Weekly Update 02-01-2010:

Initial Stages of Downturn Confirmed.

Last week we had a fairly lengthy update, so today I will just follow-up on where we’re at now.  The title last week was; “The Market Likely Topped last Tuesday the 19^th”, and that it did.  This week’s action has confirmed that.  Last week seems to have completed the “first minor downturn” of a much larger downturn to come by dropping from the previous high of 1150 in the S&P500 to a low last week of an Intra-day 1071.  On a daily closing basis this drop was a 6.7% drop. 

Furthermore, technically it gave us a clear indication that this was the end of the March 2009 rally and the beginning of a much longer term downturn.  Now, starting today it appears that the stage is set for a nice “bounce” that should retrace about 1/3^rd to 2/3^rd of this drop.  When this bounce reaches about half of the retracement we will be in an excellent position to take advantage of a “shorting” opportunity that should involve at least a 7 to 10% move to the downside resulting in an equivalent benefit to the active portion of our portfolios to the “PLUS” side.  As I mentioned in last week’s “epistle” that Version III of Core-Plus™ was designed to go “BOTH Long and Short and possibly without much time lapse in between……..and if this current decline extends much further….that our next signal may possibly even be a “BUY” temporarily before entering into a “SELL” signal.  It will all depend on what kind of range would possibly be involved in the risk/reward calculation of the potential move.”  There is a “forecasting” element built into Core-Plus™ that helps us determine the “anticipated range” of the next move in the market.  There are times of course that this “forecasting” element will have higher probabilities of certainty than others, but this is what helps us determine if the next move is likely to be sufficient enough to justify engaging our position long or short the market.  Core-Plus™ was designed to take advantage of “major” moves in the market, not just trying to “day trade” the little “dips and dives” of the market.  Therefore, we’re looking for moves in the range of 7 to 10% to justify committing to the market in a given direction.  This is also what allows us to minimize our changes to 3 or 4 per YEAR as opposed to 3 or 4 per WEEK, as would be the case with “Swing Traders” or “Day Traders”.  This being said, with the anticipated bounce this week that should retrace about half of the 6.7% drop we have just experienced only gives us a little over a 3% anticipated range to the upside.  Now if you were a “Day Trader” or “Swing Trader”, the odds are very high in your favor of taking a LONG position here and making a nice “quick” 3% gain.  However, you would also need to be “nimble” enough to be able to reverse that position quickly to be ready to reverse to a short position when that “bounce” is completed.  You must keep in mind that this type of trade would be “Counter-Trend” the market, as we are now in a Confirmed Downtrend situation.  So if you are trying to do that with an “End-of-Day” product such as a Mutual Fund and realizing that with the current volatility of the market daily moves can easily span 1 to 2% in ONE DAY, it makes it very difficult to enter into those kind of odds without experiencing a “Whip Saw” loss in the process.  Therefore, we would rather wait it out in CASH and be “poised and ready” to take advantage of a good “Shorting” opportunity when it develops.  Therefore, we will wait in CASH for this setup to take place which could develop yet this week.  Yours for Safe Sailing in Bull and Bear Markets

P.S.  Maybe in the next week or two I can give you some exciting updates on the progress with Version III of Core-Plus™.