Thursday, October 28, 2010

Commentary - Nov 10 - Time to Sell Before the News

Since the spring of 2009 the overriding theme for this investor has been 12 by 11. That is S&P 1200 by 2011. The basis for this belief has been that the S&P 500 would bounce back to $80 in earnings in 2010 or 2011 and with a low risk free rate of return those earnings would at some point get a 15 multiple for a 1200 target. It was surprising to me that $80 in earnings seemed to be accepted fairly quickly by the "experts" this year and that the S&P 500 reached the 1200 mark so early in 2010. However, that was the right level to sell this spring and it seems to be the level to lighten up again right now

In fact, instead of stubbornly waiting for the S&P 500 to hit 1200 it seems like it is time to lighten up on equities right now. The recent run-up seems to have been propelled by the "rumors" of QE2, Republican victories, and solid q3 earnings. It is very likely that by the end of next week all the "rumors" will be "news". Players in the market may likely look at that news and disappointingly realize that QE2 is mostly pushing on a rope, Washington is still mostly dysfunctional, and earnings catalysts have passed. The news cycle may switch back to anemic economic growth numbers, structural unemployment, demoralizing news from a bi-partisan deficit commission, talked down 2011 corporate estimates, etc. Hence this investor is selling on/before the actual qe2 and election news hits.

With the threat of higher interest rates at some point making a bond "bubble" a possibility, the proceeds from sales will sit in boring,non-productive cash for the short-term. If my forecast is good and the market pulls back there will be a chance to put the money back to work at a better level in a month or two.

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