MDM - Update July 7, 2011

Published : July 7 2011 at 16:43 ET

Since June 2010, the general markets have yet to correct -10% even with QE2 (quantitative easing 2) having ended as of June 30, 2011. Further, the negative news out of Portugal was not enough to take the market down.

It is a sign of inherent strength in the general market when bad news does not derail the general market. It could be that market forces are telegraphing quantitative easing out of Europe (Euro-QE). It could also be an indication of US QE3 to come. Indeed, the Obama administration says failure to raise the $14.3 trillion debt limit would be an unprecedented event that would lead to default and economic catastrophe. Strong words.

If no agreement is reached to raise the debt ceiling, Obama could invoke the 14th Amendment which would force the debt ceiling higher. This has never been done before, thus would be a highly controversial move. But nevertheless, this is a worst case scenario solution to avoid default and, what former vice-chairman of the Federal Reserve, Alan Blinder, said would prevent the market from 'tanking' if the debt ceiling is not raised.

Thus, the market seems to be pricing in an assumption that the debt ceiling will be raised, a la QE3.

 

The market is attemping to break out of this sideways, go nowhere pattern that has characterized the first six months of 2011. In addition, enough leading names are showing healthy price action in this latest uptrend, but one important caveat- many are not showing strong volume action. That may be another sign that the markets are overbought and extended. But we all know that overbought can become more overbought. Thus should this uptrend continue by the NASDAQ Composite or S&P 500 moving to new high ground, the model would be forced out of its neutral stance and into a buy signal as one should not argue with a trend.

Should the model switch to a buy or a sell signal, putting the portion of your capital allocated to ETFs straight away is normally a good course of action after a change in signal. But in this whipsaw environment that characterizes much of 2011, pyramiding into a position is an alternate strategy. That way, you lose very little should the market remain mired in this sideways choppy environment.



This information is provided by Virtue of Selfish Investing, LLC (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2014 Virtue of Selfish Investing, LLC. All rights reserved.