Click image to enlargeSorry for the brief hiatus, hope everyone checked in at least 3 times a day in our absence!
Back when Merrill, Lehman and Bear Stearns collapsed, we spoke to the CEO of a company which was hired to figure out what went wrong. We ask many people where they think the market "should" be. For some reason, his answer stood out... "on both sides of 11,000, but it will keep coming back to that number for years to come."
We've felt the same way for a long time now. There's no reason for the market to be as high as it was before the crash. Sentiment is nowhere near that level of euphoria. Nor is the economy. So that rules out us being able to sustain anything in the 13,000 to 14,000 range. Nor should we be at 8,000. We belong at 11,000. Maybe 11,500.
For anyone that's followed the basic teachings of this blog, the chart above shows three reasons why one would be lightening up on shares in the near future. The market is
1.) At the top of a trend channel, far from its moving average
2.) Near a very significant resistance level
3.) Blowing off at the top of an S-curve
Sure, it could go higher, and it probably will. But now would be a good time to be 80% in cash.
If someone were to buy into any one of the indexes on Monday, it's extremely likely that they will be back to break even in a few months time.
Without knowing what path the market will take to get back to Dow 12,700 in 3 months, we just take the easy route and let it tell us. We're 86% in cash. If it goes higher, it's a no-brainer short and hold. If it drops, we scale in. There's no need to predict anything. Well, anything other than that we're in dangerous territory now.