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Short-Term Targets Hit Means Short-Term Caution

The midterm elections -- a catalyst on the horizon that could start a sharp drop.

At The FRED Report (

), we have been bullish on the markets since late June/early July. 

The market has rallied into some of our short-term target areas, so we have been a little more cautious of late.

Understand that we remain intermediate-term bullish, but short-term indicators have moved up in such a way that a sharp drop could ensue like we saw yesterday. While we have always believed that news follows markets and not the other way around, there IS a catalyst on the horizon that could start a sharp drop. This is the midterm elections.

We see more and more analysts talking about how "Gridlock is good!" and this concerns us. Note that in 1994, the last time Republicans took the house from a Democratic Party President, the market staged a 5% drop (from November of 1994 to December of 1994). The good news was the 37% or so rise in 1995 after this had occurred.

As part of the economic backdrop we have been looking for a short, sharp pullback in gold due to the dollar spike (09/30/10 TSCM Article:

). Readers should note the performance of the S&P 100 iShares (OEF) relative to the S&P 500 Depository Receipt SPDR (SPY) longer-term here.

The weaker dollar benefits large gap multinationals and the OEF has been stronger

(it is the 100 biggest cap stocks in the SPY).

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You can also see this in the charts of McDonalds (MCD) and Comcast (CMCSA). These two stocks are in the Consumer Discretionary Select (XLY) which has been a favorite sector. MCD is a big multinational and CMCSA is a domestic company. Note the patterns and the long-term outperformance of MCD.

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To conclude, there are a couple of changes coming in the investment landscape.  Over the next week or so, readers should take a look at their portfolios, eliminate weak positions, and consult with their financial advisors about the best way to capitalize on these potential changes.

Fred Meissner is founder and publisher of

The Fred Report

. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report. A detailed bio is here:

Fred Meissner