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Liquidity System Indicator Signals Stocks Buy 10/29/14

|Includes: IWM, Financial Select Sector SPDR ETF (XLF)

XLF went above $23.44 today, so the liquidity system sold TLT and bought IWM.

In system 1 the 3.55 EST price for TLT was 119.45. There was also a $.29 dividend. So the sale of 798 shares fetched $95,552, a nice gain over the purchase price. At the 3.59 EST price for IWM of $113.91 this bought 838 shares. This price was higher than what IWM was sold for on 9/22, but TLT did better than IWM.

System 2 had 822 shares of TLT. They fetched $98,426. Half of that is $49,213, which bought 432 shares of IWM, and 2820 shares of PTY at $17.45. PTY had been sold at $18.55, and then crashed when Gross left PIMCO. I bought and sold PTY for a nice quick profit after the crash.

The sell signal for IWM (and PTY) is provided by an XLF intra-day level below $22.83, or an intra-level below 1109.30 on the R2000. The levels may fluctuate a little from day-to-day, and I may not be able to up-date them daily for a few days, but the sell will be in that area. If hit, TLT will be bought again.

My thoughts. I'm skeptical about the signal, because I fear a slide like we had when QE1 and QE2 ended. Also, the end of QE and the beginnings of QE in Europe is disinflationary if not deflationary for the US. Note that the Euro promptly fell after the Fed announcement, and Treasury bonds promptly rallied. Deflationary pressures will be good for Treasury bonds and bad for stocks and gold (the gold miners have been tanking). Also the small caps are still over-priced/expensive. But, the system is only exposed to a 3-4% loss if the sell is hit.

On the bright side, the end of October to May at the end of the 2nd year of the Presidential cycle has been remarkably good for stocks. Just think back to all the mid-year elections since 1950, and see how well stocks performed. Of course that pattern may not be causal, but it is striking. Also late October to mid-January is when small caps. dramatically outperform big caps.

Disclosure: The author is long IWM, TLT, NLY, REM.