MLR - PMP Sunday Edition 8/24/14

Published : August 24 2014 at 11:56 ET

Major averages finished Friday with mixed performance on lower volume. Fed Chair Janet Yellen said nothing unexpected during her speech at the annual Jackson Hole, Wyoming conference. She said the recent drop in the unemployment rate overstated the labor market's health, thus implied the Fed will not be hiking rates anytime soon. Thus the Fed remains stuck.

Year-to-date, the NASDAQ Composite is up 8.6% and the S&P 500 is up 7.6%. Fund managers of all stripes continue to struggle in this manufactured QE environment as they fail to keep up with their bogeys. Indeed, the latest from the trend following wizards show them near breakeven for the year:, and have been well underperforming since 2009. Unprecedented times.

Nevertheless, pocket pivots and buyable gap ups continue to work well, and moving to the safety of cash or a short position when the market does have more than a small correction can be quickly profitable as we've discussed in detail in our webinars. Gil Morales has achieved solid mid-double-digit results so far in 2014 using "roundabout" or "bottom-fishing" pocket pivots, shunning breakouts, selling into strength when a position has a 10-20% profit, and engaging in tactical short-selling when the market corrected in late January and again in March-April. Thus there are ways to conquer this market, and utilizing pocket pivots and buyable gap-ups in a manner that is not always obvious to the crowd offers a concrete method with which to do so.

This relentless uptrend began in 2009 then continued in January 2013 without so much as a correction beyond 6.1% on the S&P 500 due to a number of central banks jumping on the QE bandwagon in full measure. The many economic issues at home and abroad as well as skirmishes between various nations (Russia, Ukraine, Israel, Palestine, etc) so far have only caused short term corrections as the market is quick to find a floor. And when all hell seems about to break loose as it did earlier this year in February and then April and most recently August, the market starts to quietly tip toe higher. It has repeated this behavior a number of times prior to this year, as we all remember how bad things looked in June 2013, November 2012, and June 2012.

So while market participants continue to wait for "the big crash", over the last century, such major market action has always been preceded by ample warning signs. The Fed by way of QE has managed to keep rates at unprecedentedly low levels, but should the Fed lose control of interest rates due to an accelerating inflation rate, the stock market will most likely telegraph such aberrant action ahead of time. Of course, the market lives to surprise and such action could instead fuel stock markets higher either due to a weakening dollar or an economy that finally gains traction. Historically speaking, rising rates after a prolonged period of low rates usually indicates a strengthening economy, which in turn, pushes the stock market higher. What the Fed wants to avoid is a period of prolonged stagflation where inflation spikes leaving no room for QE while growth remains stagnant due to higher rates which remain high because the Fed has no room to print money.

The MDM will continue to utilize short term signals to move to the safety of cash as even if a crash doesn't occur, market corrections of several percent can and will occur. MDM will also utilize longer term strategies to stay long an uptrend as it did from May 13 to July 10 of this year, and most recently on August 20.

Keep in mind that minor corrections of as little as a few percent in the major indices has resulted in itchy institutional trigger fingers which push leading stocks lower a lot faster, so keep your stops tight or sell into strength. Nimble reaction times are required to benefit in this manipulated environment. The same itchy trigger fingers then are quick to buy back as fund managers must not be left behind in a manufactured market environment that continues to push the major indices relentlessly higher, thus correcting markets find a floor relatively quickly.

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