Tuesday August 23, 2011- Wall Street experienced a huge “trend up” rally today, the S&P 500 closing up 3.4%. Although we do not think the worst is over, we respect the market move and out of discipline we removed our hedges. Our cash levels remain high in the model portfolio. The fact the market moved higher on a day when the CDS spreads were moving higher on both American Banks and in Europe is a major positive. It will be interesting to see in the coming days if these spreads reverse course. The major breakdown in gold, a move lower in the TLT and the Swissy (NYSEARCA:FXF) all do point to a lessening of the stress in the system.
We finally saw the model portfolio stocks come alive, perhaps a sign of a more normalized market. Leadership stocks are acting much better on the day as a return to fundamentals may be starting. The caveat is that the market is oversold and most stocks are extremely beaten down so a good day like this can lead to easy gains. Generally a time of extreme volatility like we have been through will not end with a day like today. We will now watch for a classic O’neil “follow through” day before adding exposure. The bulls are embracing the technical hold of the latest lows amidst the failed rallies of the last couple of days. The market remains erratic and dangerous except for the most disciplined traders. It should be noted that the sharpest rallies do occur in bear markets and today’s move alone does not remove this possibility.