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Planning for the Pullback


It didn't take long for volatility to return to the marketplace.

It didn't take long for volatility to return to the marketplace. A bit of a rounding top and some indecision, and there it was.

This volatility was largely absent during the earlier part of the year when the market realized most of its gains, so it has me wondering what is causing this change in character.

Are the infusions of liquidity, encouraging economic news, and recent bank stress tests that have pushed this bull market to nearly a 12% gain with only three months on the books enough to support the market going forward? In short, I do not believe they are and I think the return of volatility is telling us that we are near a top for 2012.

With the slow summer months ahead and the US presidential election kicking into high gear, I expect that even continued positive economic news will be overshadowed by unresolved policy issues both in the US and Europe. In May, Greek and French elections should bring uncertainty to the markets. And further, as we move into the summer months, rising gasoline prices should add pressure to an already slowing economy.

I am expecting and waiting for a pullback of close to 10% before putting funds back to work in beta assets. In the meantime, I will be investing in securities that "pay me to wait" and have strong cash flow fundamentals while leaving approximately 40% of my portfolio in cash. In other words, over the summer months it will be more about risk management and capital preservation than capital appreciation.

In the medium to long term I am still bullish and will continue to look for investments that will benefit from the growth of the emerging market middle class and the rebalance of demand from the developed to the developing world.

Editor's note: Joshua Schroeder is an independent investor based in La Paz, Mexico. This article originally appeared on investing and economics site, See It Market.
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