MDM - Model moves to CASH/NEUTRAL on August 7, 2012

Published : August 7 2012 at 10:08 ET

Various forms of quantitative easing (QE) from central banks, and views that Europe’s debt problems will be bandaged with QE have pushed the markets higher on low, uncommitted volume.

2% is the approximate target for the fail-safe, but when the markets are more volatile or wide banding than normal, this 2% is increased. This is to avoid getting whipsawed, though unfortunately, whipsaws have been the nature of this news driven, sawtoothed, gap-up/gap down market. That said, the fail-safe has triggered. As we have said, these are the times when playing light is prudent, so keep position sizes small, letting price prove itself before adding to your position whether it is in stocks or in ETFs.


There are many cross currents that make for the the sawtooth, seesaw, back-and-forth, chop-and-slop market action over the last many weeks:

+ Markets rise when quantitative easing (QE), ie, easy money policies, are promised, such as by ECB President Mario Draghi last week.

- Markets falter when the promises seem empty as the problems in Europe continue.

+ Markets rise when quantitative easing/easy money policies are ongoing via Operation Twist and continued money printing by the Federal Reserve, the Bank of England, and the European Central Bank.

- Markets falter when further quantitative easing such as QE3 is left unsaid since the markets are hungry for more quantitative easing in any form.

+ Markets rise when economic data seem promising.

- Markets falter when economic data show both the UK and more than half of EU countries are in recession.


Since central banks have said they will only unleash additional QE if necessary, markets tend to drift higher on an absence of bad news. The promise of more QE acts as a safety net of sorts.

We have advocated for smaller position sizes in both stocks and ETFs when markets turn choppy. Let price prove itself before adding to one's position.

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