Getting A Little Frothy!

Some signs of caution as we start the day.

-BeSpoke Investors is reporting that the percentage of stocks in the S&P 500 trading above their 50 day moving averages has currently reached 93% which is its highest level in three years.*
-Many of our indicators are similarly technically extended and have begun to show early signs that often presage some sort of correction. However, it is important to remember that a correction can be in time (duration indicating a churning market) instead of an actual price decline. The action this week is in our opinion "a shot across the bow"-a warning of some sort regarding the health of the markets. This "shot" is particularly evident in many our shorter term indicators.
-We have seen no significant consolidation in prices since early summer. This again is another warning that stocks are possibly somewhat ahead of where they ought to be right now.

-The past three days have seen stocks end weakly with very little gain and heavier volume near the close. This is often indicative of investors selling into the early day strength.
-Speculative action is heavy in single digit stocks. Names like AIG and Eastman Kodak have seen a lot of activity that likely bears little fundamental justification. This is typical of latter stage market rally action. Also sectors that are more defensive have begun to act better relative to the rest of the market. Take a look at sectors such as utilities and consumer staples recently.

Now this certainly does not mean that the market is going to roll over tomorrow or that we can tell at this point whether we're in for a correction or not. I've posted some recently why even with all of the seasonal worries regarding September and October we could possibly see little or no decline at all this fall. Yet I think given how far we've come since March it is prudent to be a wee bit more defensive minded at this point. I've raised small amounts of cash for certain accounts who have carried lower than normal reserves this summer. I've done this after considering where I think we might be in the short term. I have also continued to identify levels where I would be inclined to add to our other accounts' cash reserves if the market does decide to take a breather this fall. As always these decisions are made individually for clients based on our understanding of their unique risk/reward profiles. In particular these decisions will also be made vis-a-vis how much cash client accounts are currently carrying. Indeed some of our smaller sized investment accounts are already carrying cash levels we are comfortable with. It's possible we won't do any further selling in these accounts absent some change in the client's profile.

We may not get the correction that probability would indicate we should see. But I think it is prudent to update the Playbook in case we do start to go down. We'll still have in our opinion adequate exposure if stocks confound everybody and head higher. But I want to have a plan in case those seasonal patterns come into play which the weight of the evidence is beginning to suggest we could see.

*Source : B.I.G. Tips, BeSpoke Advisors, 8/26/09.

**Long ETFs related to the S&P 500 for client accounts.

We are sharing for general information purposes our current thinking when it comes to investing in certain markets. This information should in no way be construed as a blanket recommendation in the purchase or sale of securities or personal advice to anybody not connected with Lumen Capital Management, LLC. If you are not a client of our firm you should either do your own homework or consult with your own investment advisor. We cannot be responsible for any actions you might take when reading this or any of our posts unless you are a client of our firm.