Yesterday's Charts: Conclusion.

I thought I'd clear the air a bit after posting my charts yesterday. I think that on balance perhaps they paint a rosier picture than what I am trying to convey. I'll try again below. This is what I think the money flow evidence is telling us.

1. Stocks are in the process of repairing themselves. That is they have recovered from their near death experience starting in March. For all the flailing about, stocks are currently trading at the same levels to where they crashed in September-October of 08. The fact that we are at the higher end of this range at this point does nothing to change this analysis.

2. The easy money in stocks has likely been made. The time to get the most aggressively bullish was in March. That is why for appropriate accounts we were at our most aggressive posture in terms of positions and cash sizing then. In my third chart yesterday I posted that I think in my current most optimistic scenario I could see stocks advancing another 4-6%. I think that is possible over the next 6-8 weeks although nothing is guaranteed. However with stocks up better than 35% from their lows and that advance largely in a single straight line, the risk reward scenario is now skewed less in our favor. It is not negative but it is not as good as it was back then. That is why we have been slowly sellers into strength.

3. We believe we are well positioned for clients given any of our current scenarios. If I am wrong and stocks do take off on a historic run, say going back to that 1200-1300 S&P level we have discussed, then we will be well positioned for that as per client mandates. At some point stocks will correct. Whether this is a correction of time or price is yet to be seen. We need to accept that truth and plan for its eventuality. That is why we not only have done a small amount of selling and repositioning we are also working to identify target areas for sale if and when stocks do again decline.

4. The study of money flows. Investors reward asset classes by injecting liquidity {more buyers than sellers} and punish by taking that liquidity away. That is why the study of money flows is one of our principle disciplines. Studying liquidity will not in all likelihood insure portfolios from any losses and it will almost certainly never prevent losses when we have a sudden unlooked for event such as we saw last fall or on 9.11.01. But it does keep your portfolio in the game, keeping it alive to fight another day so to speak. It will in general raise cash in portfolios before a crisis hits and will help garner certain clues on the current state of stocks. That is also why we are currently in the process of having a more defensive posture and that is why our cash positions have been rising {although still low in most accounts by historic measures}.

5. The Playbook: The main page of the playbook is planning for a market that continues to fluctuate in its current trading range with a certain amount of upside bias through mid-summer. After that we expect to become more defensively oriented due largely to seasonal patterns in stocks. We think that stocks will have likely one more surge going into year end. At this juncture given what we know, I think it is possible that stocks could (and I emphasize could) end the year with gains in the 8-15% range for 2009. Of course this is how our misty crystal ball looks right now. We stand ready to change as the facts on the ground change.

*Long ETFs related to the SPY and to the S&P 500.