Bullish Trends and Significant Corrections

• Bullish Trends and Significant Corrections
  June 19, 2009 - Non-Client Version
  
  We were recently asked by a client, "If you see signs of a possible new bull market, why are we still sitting on so much cash?" It can be answered by using a fence analogy. We have been taking some smaller positions while maintaining a relatively high cash position in order to play both sides of the fence:
  

The Far Side Of The Fence: If stocks move lower,

• Our smaller positions reduce risk during a correction, and we have cash on hand to invest during/after a correction. If the bear market resumes (anything is possible), we have less exposure to losses with some cash on hand.
• Numerous asset classes have had significant moves off the March 2009 lows.
• Even markets which have a positive trend, correct from time to time.
• Corrections, within the context of an uptrend, can be significant.
• If a correction is orderly, we can use cash to enter markets at lower levels.
• If the correction is not orderly and a resumption of the bear looks more likely, cash and smaller positions enable us to better manage risk. If your investments lose 12%, but you have 50% of your account in cash, the loss to your account is 6%.
• As our strategy dictates, we gradually make the transition from a bear market portfolio to a bull market portfolio, and remain aware we could be wrong about bullish outcomes. If we are wrong, we stop the transition and reverse course gradually.

The Near Side Of The Fence: If stocks continue to move higher,

• We have an opportunity to participate.
• In the 2007-2009 bear market, markets came down rapidly with little in the way of countertrend moves, which means it is possible a similar situation may occur on the way back up – a rapid climb with little in the way of significant countertrend moves (which is what has happened so far during this rally). It is possible those who wait for a significant correction, will only get that opportunity from much higher levels. A significant correction is coming - the question is from what levels (now or later).
• In early June, numerous asset classes “broke out” above resistance levels which can offer a lower risk entry point since what was resistance becomes support.

http://www.ciovaccocapital.com/sys-tmpl/fencesitting/