Do you feel lucky?

September 4, 20124 Comments

The Fed meeting on August 31, 2012 was much ado about nothing. The same message was relayed as at the last meeting: If the economy fails to improve, the Fed will ease further (QE3). The recent rally is based on an assumption that the Fed will stimulate very shortly. Note on this week’s SPX chart, however, that the market is a bit leery of the certainty of that outcome. It has been weakening right on schedule—per my prior blogs. I suspect a few investors have joined me in taking a few profits lately. It’s also interesting to note that “smart money” commercial hedger positions in equity index futures, excluding the S&P 500 were recently nearing their largest net short position in 8 years, according to

Perhaps the Fed will introduce QE3 this month, but (as mentioned in my last blog) the Fed has historically NOT stimulated until later in the fall since the economic slowdown began (typical action by the Fed has occurred in October/November). Thus, I feel that to be fully invested at this time is a bit of a gamble. Yes, the Fed could break their historic pattern and introduce QE3 shortly. If you are fully invested under that scenario, your gamble will pay off. My upside target for the S&P under these conditions might be 1500, as mentioned in prior blogs. However- if they don’t stimulate in September and hold off for a couple of months, it may be a short termed unpleasant experience for fully invested market players – my downside target is for 1300 – 1360 under a Fed-disappointment selloff.

Personally, I am not a gambler  – I trade when the odds are more predictable or in my favor. I’ve taken a more defensive stance lately by raising over 30% cash in my equity models, and limiting the majority of my equities to low-beta positions. The worst-case scenario for my cautious stance is a Fed-induced rally where I underperform the markets a bit.  I will still make money on my current positions, but I’ll certainly miss out on some of the fun. I can live with that underperformance. If the market performs poorly, as I suspect it might if the Fed follows its traditional pattern, then I have some cash on hand to buy cheap stocks when the time is right. The question most investors should be asking themselves right now is: “How lucky do I feel?”




    • There is a survey of newspaper and magazine headlines out there that tally’s them all as to “bullish, bearish, or neutral” and then plots an indicator–not sure where you can find it but I’ve read of it before. Same idea as all sentiment indicators–too many bulls = bad, and visa versa.

  • I have read that, traditionally, the Fed doesn’t stimulate in the run up to a presidential election, for obvious reasons.

    But Draghi has done that instead, promising to buy bonds today.

    SPY and QQQ have reached a 52 week high today and IWM almost.

    • Yes-nice move today–it will be interesting to see if its a real breakout, or a spike. Give it a few days to confirm the breakout as being real. As mentioned in my blogs, I am around one third cash, but 2/3rds invested (decent weight in gold, banks and energy) so I am participating in the rally, with some reduced upside due to the cash. I continue to remain cautious and won’t increase my equity allocation until later in October–that is my discipline. Seasonal influences and the still very real potential of a “disappointment by the Fed selloff” still linger.
      I continue to believe that there are too many potential anvils in the sky waiting to fall on the market to be fully invested. A good chunk of cash cannot lose money–it can only cause temporary underperformance–not a bad price to pay. Meanwhile, if you hold some sectors that you like (eg– those mentioned above) it still allows decent upside if the market continues onward and upward.
      We’ll see.


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