Remaining in Cash

The U.S. equity markets appear to be strengthening from its October doldrums on news that our leaders in Washington are close to resolving the fiscal cliff crisis. While the market may be experiencing a sugar high from this news, we anticipate further downside from these levels due to several factors.

First and foremost, our behavioral market model that pulled us out of the market on October 22 is still providing negative readings. That of course can change in a moment’s time but the recent sell-off has been very mild and not indicative of a pending financial crisis.

We say pending financial crisis simply because the Presidential election provided a status quo of all the major fiscal players in Washington. Why one would be led to believe that the end of a brutal election cycle will bring all parties together when history suggests otherwise is perplexing. And suppose there turns out to be a grand bargain. It will include both raising taxes and excessive spending cuts, when history shows that both will most likely be counterproductive for boosting economic growth.

Add the additional risks of war in the Middle East, rising fuel prices as a consequence and Germany falling into recession and one makes a strong argument why not to buy stocks now.

Is it possible that we are wrong in our analysis and the ensuing rally is Santa Clause arriving early?

Perhaps, time will tell.

Bottom Line: We are positioned in our cash and “short” positions and will adjust accordingly as dictated by the market.

We at JSK would like to take this opportunity to wish all our clients, friends and family a very Happy Thanksgiving.

Joseph S. Kalinowski, CFA