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What Goes Up...Must Come Down

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In our client conversations since early December, we have been extremely cautious with loading up on the long side of a market that has been seemingly one-directional for an entire quarter. As a result, we have continued to stress the need for a modest pullback in order to have some firm footing beneath a continued push higher moving forward. Something we have not experienced since mid September into early October when we saw a reversal just shy of 5%.

Even with our bullish sentiment for 2014, a pull back to 1760 in the S&P 500 would be more than welcomed as we tend to believe such reversals are healthy and lead to a more sustainable path higher. Hitting a high of 1849 on Tuesday, a pull back to 1760 would be an identical retracement to the move experienced in late September, coming in at 4.8%. In our opinion, a failure to follow through on today's selling pressure (the S&P 500 down 17 points or .92% with 4 hours of trading remaining) takes us into dangerous territory with every percentage point higher that we push without a 5+% pullback.

Looking at the current fundamentals of the market, the dynamics could not align any better, in my opinion, for some healthy selling pressure. Earnings thus far have seen pockets of good, but overall have been less than stellar. Uncertainty throughout the rest of the world remains prevalent, particularly with China as made evident through today's manufacturing data, which registered an unexpected contraction for the month of January. Not to mention we are still dealing with our own uncertainty as interest rates are in flux and a majority of Americans remain far from convinced that we are in what one would consider a "better" place, according to a recent pole showing 74% of those surveyed believe we are still in a recession.

Add all of this up and you have an environment that does not necessarily scream raging bull. With that said, every investor should understand that this is not to be considered empirical fact, and that the trajectory of the market often flies in the face of what one might expect, regardless of whatever opinions or data is out there. However, as a firm we tend to believe that uncertainty will once again rear its ugly head and weigh heavily over the market in the coming weeks. Today is a good start with the CBOE Volatility Index (VIX) trading north of 14 for the first time since the beginning of the year, signaling some fear creeping its way in.

Now, whether or not uncertainty moving forward comes in the form of geopolitical risks or uncertainty around the prospects of our own economic growth, I do not know. But, I do believe that any bull has to understand that we are currently sitting in a dangerous area, and that a pullback to that 1760 level in the S&P would be a welcomed breath of fresh air. Let's see how the rest of the trading week plays out.

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