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Think it Through

Sigma Investment Counselors

October 8, 2012

A client forwarded an article to me regarding the strong movement of the stock market and suggesting a sale of stocks. He wanted my input – My response, and the actual article, follows.

Bob Bilkie, CFA

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Dear xxxx:

Well, I don’t know.

If you read the comments of the “expert” cited in the article, he notes: a) “We’ve come too far, too fast.” Okay, what was the actual speed limit and how far were we supposed to come? Then, b) “… he notes that the first couple of months of the fall are historically weak months…” Well, if it is only about pattern recognition, everyone would have sold already in anticipation of the “weak months” and bought in advance of the strong months. It’s just not that easy. Finally, c) “…uncertainty over the election and the looming fiscal cliff…” Markets are a discounting mechanism, pricing in all of the known uncertainties (if you were standing inside a building getting ready to launch a bid to buy it and it started to rain and a drop hit you in the head, your bid just fell). It is the “surprises” such as coups, assassinations, and tsunami’s that move markets unexpectedly.

Unfortunately, those in my trade have a marketing reason to try to get press – a client might turn up as a result. Also, the risk of being wrong is not that great because investment professionals never have to admit to being wrong – only to being early because eventually, the markets move in the direction they predicted.

The best course of action is to adopt an asset allocation framework that works in all market conditions. When I say works, I mean, an allocation that you can tolerate without panicking by buying or selling at emotional times.

Hope that helps.

Best, Bob

Client: Thanks Bob—as usual, this is very precise. I’ll sleep easy knowing that you’re on the job.

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Warning: Stock correction may be coming
By Hibah Yousuf October 4, 2012: 2:42 PM ET

U.S. stocks have rallied nearly 15% since the start of June, and one expert said that means the market is ripe for a pullback.

“We’ve just come too far, too fast,” said Sean Clark, chief investment officer of Clark Capital Management Group in Philadelphia, who expects stocks to pullback between 5% and 10% during the next month, leading up to the election. “We think it’s time to take some money off the table.”

Most of the gains during the summer were driven by speculation that the world’s central banks would intervene and take new steps to stimulate the global economy. Then in September, stocks spiked on the days that the European Central bank outlined its bond-buying program and the Federal Reserve announced its third round of quantitative easing, or QE3. With the exception of those two days of robust gains, Clark notes that that stocks were relatively flat through September, adding that the first couple months of the fall are historically weak months for the market.

Plus, the uncertainty over the election and how and when lawmakers will address the looming fiscal cliff presents major risks for investors, he added.

“It could get really ugly, like what we saw over the debt ceiling debate during the summer of 2011,” said Clark. “I don’t think we’ll get to that kind of scenario because nobody — not the president, not Congress — will want to take the blame for that. But we still could see a lot of political drama and increased market volatility.”

In anticipation of a pullback, Clark has boosted the firm’s cash position to about 15%, from less than 5% just a few weeks ago. The firm’s current cash position is close to what it was during the depth of the financial crisis.

Clark has also shifted into defensive sectors, including health care, utilities and telecom, which tend to boast high dividend yields. The firm is also focusing on blue chip stocks, which tend to be steadier, as opposed to small and mid-cap companies.

After enjoying the QE3-fuled gains, Clark has also cut its exposure to commodities like oil and copper. The only commodity he is still holding onto is gold, but he has slashed its position in the precious metal by 50%.

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