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Samples of Archived Commentaries:

July 2007

From the time of our late-May Alert until the end of June, stocks have basically gone nowhere. However, behind the scenes of relatively flat returns, the month of June ushered in a heightened dose of volatility. Like the exasperating punt returner in football that runs from sideline to sideline multiple times only to end up with a one yard loss, the stock indices experienced a series of swift declines and rallies before mostly ending the month with losses between 1 and 2 percent. So what does this volatility mean relative to the May Alert and the market going forward?

First off, the Market Indicator's shift to Negative in late May correctly warned of the increased risk in the stock market. As we suggested might take place at the time, the market did not immediately tank but rather has entered a consolidation (possibly a topping) pattern where sustainable gains are hard to come by. Hopefully reducing exposure to equity funds enabled investors to lock in some profits from the rally from last August and avoid some of the turbulence of this past month.

But certainly, our lowering of the Equity Allocation Target was not for protection from a market that goes sideways for a prolonged period of time. It was meant as always to avoid potential larger losses stemming from increased market risk, as indicated by the Market Indicator. And when the Market Indicator turns Negative, it means that there is enough deterioration in the broad stock market that it is vulnerable to a significant correction. Therefore, when we see the Market Indicator turn Negative, whether we think the market will simply "work off" its risk by moving sideways or enter a serious bear market, we do not know for sure. Therefore, it is best to take defensive measures by lowering our investment level first and judge the nature of the subsequent market action later.

The market can "work off" its risk over a volatile period of ups and downs like we are witnessing now. Through this process, the volatility will scare enough investors or traders out of the market until the supply/demand balance tips back into the favor of demand. If this market is indeed "working off" its risk through its up-and-down action, it's possible the next rally in the market could begin without first experiencing a significant correction.

However, markets that go to one extreme eventually visit the other extreme before the cycle is complete (witness the stock bubble in the late 1990's that led to the nasty bear market from 2000-2002.) The extremes during the 2003-2007 bull market certainly have not reached the levels seen at the height of the bubble. However, they've become extreme enough that we can expect a more serious correction than what we've seen over the past 4 years before the stock market can really begin a new, lasting bull market.

The best news for subscribers is that you do not have to concern yourself with these issues. That is what My401kPro is for. Simply increase your equity allocation amount when the Market Indicator turns Positive like it did last August and lower your equity exposure when the Market Indicator turns Negative as indicated in the late-May Alert. If you do that, along with using the Fund Rankings to target the best funds to invest in, your retirement account will be in great shape in the long run.

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