Major averages recovered from their gaps lower on news of the failed Doha talks by major oil producers, and managed to finish higher on mixed volume. Oil also gapped lower by some 4% but managed to recover much of this drop on news of the oil strike in Kuwait as well as short-covering.
MDM and VVM both went to cash at yesterday's open. As we know, the last couple of years have been quite challenging, thus at certain junctures, profit taking can be prudent especially when risk/reward favors it. And protecting profits while minimizing risk has been essential.
The number of various recent headwinds adds weight to the risk side of the equation. Such headwinds include the ongoing lackluster performance of leading stocks as well as the rallies in the major indices that are getting long in the tooth as this is the longest, sharpest rally in the NASDAQ Composite without any minor correction since early 2012. The current rally even beat out, just barely, the rally that started in Nov 2012 which marked the anticipation then the start of QE3.
Another factor is that oil has correlated closely with equities especially this year. With oil gapping lower by 4% before yesterday's open due to the failed Doha talks by major oil producers, the start of a sharp correction could have occurred, thus boosting risk in continuing to remain on a buy signal in the MDM and a sell signal in the VVM.
Of course, QE continues en masse so the capital has to go somewhere, thus yesterday's action certainly shows the resilience of the markets. Still, QE has been with us since late 2008, yet markets always still undergo some sort of correction, however mild, which the current rally has yet to undergo. With the US having exited its QE program quite some time ago, this somewhat counters the QE moves by other central banks. Nevertheless, some trends can go a lot further than expected, so the models could go back into the market depending on risk/reward as it evolves.