MLR - PMP 8/28/13

Published : August 28 2013 at 8:50 ET

Major averages sold off again this time on higher volume on worries about escalation in Syria. Such situations can cause very high moments of unpredictable volatility in the markets.

If the situation with Libya in 2011 is any indication, organizations called for a no-fly zone over Libya beginning on February 21, 2011 based on allegations that Muammar Gaddafi's military had conducted airstrikes against Libyan rebels. The NASDAQ Composite sold off -8.3% and the S&P 500 sold off -7.1% over the next month in part due to the situation in Libya but also due to the eurozone debt crisis. Thus the Market Direction Model has moved to a neutral/cash position.

The NASDAQ Composite is currently off about -3% and the S&P 500 about -4% so there could still be more selling ahead before the market finds its footing.

While bonds have been selling off for months, equities have only been selling off for weeks, so it's possible that the equities market is getting nervous ahead of the start of tapering later this year, thus is looking for any excuse to sell off. Perhaps the market senses big trouble ahead if the Fed has indeed painted itself into a corner with all this quantitative easing that has artificially propped markets higher since 2009.

The counterargument is that China, whose economy is possibly turning the corner, has been selling its US treasurys and buying precious metals as it wishes to reduce its investment exposure to the US. US treasurys could also be in a position to rally if the economy does not make a decent recovery, in which case, Barclay's 20+ year Treasury Bond ETF (TLT) may continue to bounce off its recent lows into a more sustained uptrend, an indication that tapering will be delayed or minimized. Even though the Fed has said tapering will begin either in September, October, or December, it may be minimal or the Fed may taper in an unconventional way so as to have minimal impact. The situation in Syria and the threat of unraveling the fragile global recovery by tapering too aggressively or too soon could turn aggressive Fed hawks into doves.

Thus the 2-month rally in precious metals could be due to any or all of the following: oversold conditions, buying in China, the market sensing that tapering will be done in a minimal manner, and the fear factor over the last few days regarding Syria.

A number of leading stocks have held up fairly well in the recent pullback. Tesla Motors (TSLA) was up on the day, Facebook (FB) had a lower volume pullback after two days of closing highs, LinkedIn (LNKD) is trading somewhat sideways since its recent gap up, Qihoo (QIHU) is holding yesterday's gap up, Stratasys (SSYS) is one day off its peak, and Netflix (NFLX) is one day off its recent 2-year high.

Meanwhile, a few leaders are having a tough time including Amazon (AMZN) and Google (GOOG) trading squarely under their respectively 50-day moving averages.

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. ©2016 Virtue of Selfish Investing, LLC. All rights reserved.