Holding Pattern Extended - As Market Panics

In the last post dated July 11th, 2011, after Alcoa reported a 27% increase in earnings despite a 24% increase in the price of aluminum, I stated, "This should be a good sign since demand has not indicated weakness despite inflationary forces on commodities such as aluminum.  Assuming the doom sayers are wrong (and they usually are) this is a solid indication that the markets will find their footing by the end of July to mid August." This last couple of weeks has given the doom sayers a lot of ammo, and the market is reacting in a panic.  This will create opportunities as the market corrects.  However, the global financial mess will continue as long as countries hold interest rates at artificial record lows.  Historically low interest rates put us in this position, and it doesn't seem logical to me that more of the same will take us out of it.  Until interest rates rise, we will see higher volatility in the market as investors chase higher yields at greater risk while trying to avoid significant losses.  A good sign (or logical) to me is that bond rates have gone up for the PIGS.  For now this has resulted in lower yeilds on US Debt, but I expect this to be temporary.

My strategy so far has been to hold about 50% in equities and 50% in secure assets (bonds, etc.) as I continue to wait for the slope of the intermediate signal line (blue) to turn positive (see chart below).  When this signal is triggered,  I will begin employing a cost averaging strategy of transferring incremental amounts from secure assets to equities on days or weeks when the market has dropped significantly.  It is important to note that there is no fool proof strategy, and there is risk entailed with every investment strategy.

Sentiment Chart Updated 8/5/2011 (explained in previous blogs):