Correction May be Over

The correction that begun in early May has led to 14.5% correction in the S&P 500 index. During this time we experienced the flash crash on May 6th (the DJIA falling 1000 points in a single day before a quick rebound) and have witnessed severe volatility since. While many of our short term indicators hit oversold extremes in late May we did not experience much of a rebound. We took a 33% position in equity ETF's on May 20th when the oversold indicators were at extremes. We reduced that equity exposure to 12% on June 7th as the extreme oversold condition had been relieved and the market still was not exhibiting any signs of a bottom formation. We have since retested the lows in the S&P 500 at the 1040 level, and held. This was the third time we have tested that level, and it has become a level of critical support. The fact that we have held this level in spite of recent bad news on employment, the Gulf oil spill, retail sales, and European sovereign debt woes, suggest that the correction may have run its course. The sentiment indicators are not a favorable as they were just 2 weeks ago, but still show significant pessimism, which is bullish. We are raising our equity exposure back up to 40%. The longer term technical indicators we follow never hit levels that signal total capitulation, but they often do not reach those extremes in bull market corrections. We continue to play this move as a correction in the cyclical bull market that began in March 2009. If the S&P 500 were to break the 1040 support level , we would look to return to a fully defensive position.