MDM - Update July 7, 2011
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.
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