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Wednesday, February 8, 2012

Stocks appear poised for a pull-back, based on technicals

Stocks have rallied dramatically from the December lows, with the S&P 500 gaining over 12% and the NASDAQ up an incredible 15.5%, hitting a new 11-year high - the highest level we have seen for this index since the peak of the tech bubble in early 2000.  Stocks are extremely overbought on a technical basis, and appear ripe for a short-term pull-back of at least 5% to 10%.

In the chart of the S&P 500 above, we see a significant amount of congestion around the 1,350 level.  The high over the past year or so is 1,364.  While we are experiencing a strong uptrend from those December lows, I believe stocks will have a difficult time penetrating the resistance at the 1,350 level, and will most likely experience that pull-back very soon.  Should we advance through 1,350, we could certainly trade up into a new, higher trading range.  In fact, eventually I believe that is exactly what will happen.  I have a 1,500 target for the S&P 500, sometimes during 2012.  However, I do not think we will get through this level before we see a pull-back.  As a result, I have trimmed positions and now hold approximately 40% in cash for stock allocations.  I am still 60% invested in stocks, because, of course, I could be wrong!  I also sold calls against existing positions with March expirations to raise additional cash.

I will look to put cash to work should we get a short-term pull-back, focusing on those sectors that will benefit most from the U.S. economic improvement I believe will come over the next few years.  This would include Technology, Industrials, Financials, and Consumer Discretionary stocks.  I will look at energy in the future, but with oil near $100 per barrel, I am not a buyer.

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