Dipping Our Toes Back in the Water 06 10 2011

The market is now in an extremely oversold condition after an S&P 500 decline of over 6% as I write and the small caps (iwm) are down about 9% since April 28th. The markets have now endured roughly six weeks of declines.

We have managed to shield our accounts from much of this pain by going largely to cash. Markets rarely go straight down. When investor sentiment reaches extremes and stocks become extremely oversold the large players begin to quietly accumulate stocks. According to our "Effective Volume" studies we are reaching the point where there is a likelihood of, if not a short term trend reversal, at least a short term bounce.

I have begun to dip our toes back in the water with equity purchases in the beaten-down sectors, i.e., small caps (IWM) and a small amount in materials and energy. We may be a little early, but scaling back in at these levels seems to make sense from a risk/return perspective.