Gabriel F. Burczyk
Our Market Sentiment indicator turned negative today, 13 months since our Market Sentiment indicator turned positive in April 2009. As such, we will move from our current cash position of 50% to 100% by the end of the trading day in the All Cap Core strategy. Over the past few days we have been aggressively raising cash as Market Sentiment began to deteriorate causing us to take a proactive defensive position.
The Market Sentiment indicator is not a predictor of markets and it does not capture the absolute tops and bottoms of the market - it is not an oracle. However, what we know with 30 years of Market Sentiment data is that once the indicator turns negative, fundamental investing becomes less important as emotions start to affect investment decisions. In negative Market Sentiments, market volatility increases and the market becomes intolerant of risk. In these emotional, high risk markets, there is a much higher possibility of a significant loss of capital.
How long the market will remain negative remains to be seen. If the US economy is able to persist in its recovery phase despite the problems in the Euro zone, the time the market will spend in negative territory may be short in duration. However, the best strategy now is to play defense by moving to cash and let the market works its way out of this condition. These are the times that demonstrate the importance of a tactical strategy to protect capital in declining markets.
Best Regards,
Simon
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