Markets Continue to Play Out 2011.



While remain invested - we do so cautiously with higher cash levels than normal.  While the markets currently climb the "wall of worry" as bad news continues to spur hopes of further stimulative action from the Fed - the concern is that, as shown in the chart, the current rally is exactly the same set up as seen last summer just before the August swoon.

I am not saying the same thing is going to happen this year.  However, the current market rally is pricing in any potential action from the Fed which, in turn, is likely to keep the Fed on the sidelines for a while longer. With the continued deterioration in the economy, consumer weakness emerging, yields surging in the Eurozone, the volatility index sitting near lows and markets overbought on a daily basis, the risks are mounting for a sharp correction.

Furthermore, these risks become much more prevalent in August as Europe effectively shuts down for summer vacation.  This means there will likely be little action, if any, coming out the Eurozone to head off any potential risks.  While the weight of evidence is definitely not investor friendly - you can either be more cautious with equity allocations, reduce portfolio beta and hedge off market related risk or "hope" that Bernanke "gets to work" sooner rather than later.