[First appeared on Seeking Alpha on July 1, 2012]
The rally in equities on Friday was the product of good news meeting low expectations. As we enter Q3, the market may be positioned for this theme to play out on a larger scale. Macro concerns, bad news and underwhelming economic numbers have caused investors, analysts, companies and the Federal Reserve to reduce their growth projections. As this has been happening the market experienced a 10% correction, but, significantly, did not meltdown and has recovered from its recent lows. Investors have had a lot of time to factor the bad news into their game plans, but the one thing that has been absent from the conversation is the potential for good news. It is important to remember that bad times will be followed by good times and good times turn into bad times. When we are immersed in a bad period, but no major crisis emerges, we prefer to position our portfolios for an upturn. For much of Q2 we sat on the sidelines with a large cash position, but as we enter Q3 we are increasing our long exposure and buying stocks because expectations are low and positive catalysts could come from a number of places.
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