Market Wrap - week ending 11/15/2013

Hello everyone, we waded back into the market this week with a 55% exposure.  Although we are still seeing a slow breakdown of quality stocks, the market reversed is sharp decline last week and moved higher at the end of this week.  A classic “fake-out” yet again. 

We have seen our share of fake-outs this year with markets sharply dropping for two to three days, then sharply reversing and moving higher.  Fake-outs are quite normal in the market, but what I don’t like here is the level of intensity in the drops.  We’ve seen a number of times this year a relatively stable quiet market, then a very volatile sharp drop which is out of character, then a sharp rise (again out of character) after which the market settles down and goes sideways for a few weeks before doing it again. 

Looking back at history, this pattern is not normal and certainly won’t continue forever.  Generally when we get a sharp one day decline of 2% or more (like we had last week), investors get really freaked out and panic and although we usually get a small bounce up from there, the bounce fails quickly.  Here we are seeing sharp drops with an immediate sharp counter bounce up. 

The behavior doesn’t make a lot of sense.  We have extreme panic one day, then extreme euphoria the next.  Makes me think the computers are running the show where the buying is literally turned off for a few days, then a switch is pulled and tons of buying occurs … OR … the market is being supported by the Federal Government, just as panic sets in they step in and start buying to calm everyone’s nerves again. 

I’m not a believer in conspiracy theories, but something out of the norm is causing this eccentric behavior in the market for sure.  So far the best course of action this year has been to just close your eyes and ignore the daily movements, a ‘Buy and Hold’ strategy, yet as we all know this type of strategy eventually bites you when there finally is a clean break and we drop 20+%, which we are obviously overdue to do.

So, although this has been a frustrating market for defensive strategies like ours, I still have no doubt that over the long run we will win out by far.  The bull market of 1999 is a great example to compare to today’s market, it mirrors the moves almost exactly, and looking at 1999 we peaked late in the year and had a massive decline that lasted 3 years afterward (in 2000, 2001 and 2002) which wiped out all the gains and then some.  I'm certainly not going to try and imply what the future holds for us here, but I do know that this forgiving, constantly rising market cannot go up forever and we still have a lot of weak underlying issues that I mentioned in last week’s email that have not been resolved.

For now we stay invested cautiously and wait for more directional clues.

Hope you have a wonderful and safe weekend.

Respectfully,

Randall Mauro

Resnn Investments, LLC

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