Market Rises 1.4% As Mubarak Steps Down!

The market rose 1.4% in another positive showing bringing its YTD return to 5.7%. Egypt was again in the news as Mubarak bowed to pressure and finally stepped down. The quick changes that came about in Egypt may put additional pressures on other countries in the region. Those developments are probably good long term, but there is risk of greater instability over the short term. The market continues to shrug off these developments largely off the strength of corporate earnings and improving economic conditions. Earnings reports remain overwhelmling positive, although some big names have disappointed most notably Cisco last week. We also had good news over a better than expected weekly job claims report which suggests the employment picture is indeed improving. We like the strength we see in both the stock market and economy and remain long term bulls. However, as we said last week, we would not be surprised to see a minor correction of 5% or so. Volatility fell again to very low levels (15.7), and that along with falling short interest, suggest the market may move lower. When volatility and short interest are low, that means too many investors are bullish and perhaps even complacent, and that is when the market often corrects. We expect the market to move sideways or down over the near term which is why we are sitting on more cash in our portfolios. In addition, there is always more uncertainty and risk during the few weeks of each quarterly reporting season, another reason we like to go a little slower when buying stocks over this period. With volatility this low, now is a great time buy some protection using options against the VIX Index or the SPY ETF. We purchased a VIX call spread for protection last week and may try to create a hedge this week using the SPY ETF.