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Simon Baker and King Lip, of Baker Avenue Asset Management, were recently interviewed by CNBC regarding their All Cap Core strategy. The central premise of the buy and hold strategy, how it ignores the changes in risk in the market, and the dynamic approach of capturing the upside and protecting the downside, were the main themes discussed. Access the entire Baker Avenue Asset Management interview here.
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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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Now that spring has arrived, kids are excited about visiting their local amusement parks to ride their favorite roller coasters. With the recent gains in the stock market, investors also seem to be queuing up again for the roller coaster ride in stocks. US markets continued their climb in the first quarter of 2010 with the S&P 500 Index gaining 5.39% on the quarter, the Dow Jones Industrial Average gaining 4.81%, and the Russell 2000 small cap index gaining an impressive 8.85%.
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Baker Avenue believes the changing economic and market conditions as we move forward will best be suited for a strategic tactical approach to building wealth and managing risk. The basic buy-and-hold strategy using simplified diversification will not offer the benefits of the tactical approach. By identifying market sentiment, momentum, risk, and cyclical moves within secular trends, Baker thinks their approach is the optimal way to navigate the future.
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Baker Avenue believes it is just as important to play defense as it is to play offense in the stock market. Although their sentiment indicator is still in bullish territory, they are remaining cautiously optimistic for the rest of the year. There will be pullbacks in the market going forward, but they believe the upward primary trend is still in place.
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