Ask Mike:
Should we be moving to cash?

Question:

Kelly from Cardiff, CA asks:

Hi Mike,

I've been with you from the beginning in the ETF portfolio and want to thank you for great return!

Based on what you've been saying for the last several weeks, I am concerned that we may be at a market top. You went completely into cash back in May of this year, which was a great move.

I am just wondering why you are not moving to cash now?

I'm following you, trade for trade and believe you have a great handle on timing the market, but wanted to know your thoughts on this?

Kelly

Mike's Response:

Hi Kelly,

You are right to be thinking we could be at a market top. If history is a guide for us, here is what we know:

• There have been 4 other times in the past 106 years that the market has been in a well defined consolidation range.
• The average duration of those consolidation periods has been more than 14 years.
• In every instance, when the Dow would move up above its upper resistance level (in this case, 11,722), only 2 things happened
1. It would only briefly stay above its upper limit and then immediately fall back in a pronounced correction, or
2. It would go on to a multi-year bull market.

Now... it is entirely possible that history will not repeat itself. We won't know for sure until time passes. But, this particular time in the market does call for caution.

I fully recognize the historical significance of repeating patterns. Using repeating patterns and trends is a major component of our investment strategy. However, there are a lot of reasons why this current bull market has legs and, as such, why I am 100% invested:

1. The global economy is strong and growing with little sign of over-heating or crashing.
2. The US economy is coming in for a soft landing. Therefore, the likelihood that we will be moving into a recession is significantly diminished.
3. The 3rd Quarter earnings are looking to be reasonably positive and certainly positive for the market.
4. The 4th Quarter looks to be a solid quarter for earnings.
5. Energy costs are going down. This puts more money into the pockets of consumers.
6. Consumer sentiment is strong.
7. The Christmas season is coming and looks to bode well for Retail. A good Retail Sector bodes well for the entire economy.
8. The Fed is most likely through raising rates for this year and may actually lower rates shortly after the start of 2007.
9. The mid-term elections will likely leave us with a congress that won't get in the way of progress, so regardless of who wins in November, the economy should continue to move in the right direction.

I expect we will see some increase in volatility over the next 2 months. And, there are some Sectors that are not performing well in this market.

There is still a fair amount of geo-political issues to be concerned about any of which could hurt markets temporarily. But, I suspect this market will remain reasonably bullish. We could make the most of our gains for the year in the next 90 days.

So, I am very optimistic about the next 3 months, but I do expect to see some sell-off and profit-taking. As we stop out of positions, I will be replacing them immediately the following week. I am keeping my stops relatively tight and, on occasion using an Aggressive Stop Loss Strategy.

I don't plan to go to cash unless the overall market trends confirm that we have reached a market top. If that occurs, we will be going to cash quickly.

Thank you for the question and thank you for subscribing!

Best regards,

Mike