Coming Correction Could Be a Buying Opportunity

The highs are close, but at this point, I do believe the coming correction will be a buying opportunity. The only thing that could change my mind is multiple high volume selling days based on deteriorating macroeconomic news. Right now I think the market has displayed enough of a bullish character to give this rally the benefit of the doubt.

We are at a point based on the percent of stocks above their 50 day moving averages that all but guarantee a correction, albeit likely to be a shallow one. Opening new longs right now after 6 weeks of gains is really pushing your luck.

Comments

[Deepv:]

Market timing LOL

Apr 19 10:03 AM

[dbc:]

This is a basic point that makes sense, although bullish sentiment is likely to prevail over the short term. Ag and metals shoud be reasonably good places to be as the market corrects, and as macroeconomic conditions provide continuing uncertainty.

Apr 19 10:06 AM

[Old Trader:]

I find myself wondering if the old chestnut "Sell in May and go away" will hold true this year. That would go along with predictions of a correction, whether a shallow one, or a more substantiative one. Given the large number of earnings numbers due out this coming week, there might be some more clarity of what lays ahead, at least in the near term.

Apr 19 10:31 AM

[RiskReturnO...:]

I'm no technician, but the rally from Nov 20, 2008 to Jan 6, 2009 was also six weeks. Coincidence or some magical cycle ... I'll leave it to the Astrology / Fibonacci guys, but market does look quite toppy to me. Friday's close up looked ficticious, almost like someone just wanted to have a UP day for some technical indicator. I'm buying low cost (VIX is down) puts as a insurance through the earnings season.

Apr 19 11:44 AM

[MarkitWacha:]

Do you think the VXX ETF is the best way to buy insurance, or would you just buy the put options on SPY straight out?


On Apr 19 11:44 AM RiskReturnOptimizer wrote:

> I'm no technician, but the rally from Nov 20, 2008 to Jan 6, 2009
> was also six weeks. Coincidence or some magical cycle ... I'll leave
> it to the Astrology / Fibonacci guys, but market does look quite
> toppy to me. Friday's close up looked ficticious, almost like someone
> just wanted to have a UP day for some technical indicator. I'm buying
> low cost (VIX is down) puts as a insurance through the earnings season.

Apr 19 12:00 PM

[TheFounder:]

Market is overbought. I alays find that the best time to position for a correction is on strong up days when optimism is at a high level.

Another possible strategy is to wait until we get closer to the 200 day MA which is a strong resistance level, currently at 970.

It needs a true recovery to cross the 200 and stay there. It also needs momentum and conviction, which I believe we shall lose before we get even close.

Apr 19 12:19 PM

[InvestBaboo:]

It is all a matter of perspective. If you eliminate the March's unnatural market lows driven by undue hyper-pessimism then the market rally would appear to have a much longer way to go. It is all a question of future earnings and if future earnings are not as bad as the bears thought and the banking industry is not going to collapse then the market indices should be at a much higher level than today. The thinking by the bears before earnings season commenced was that the correct multiple for S&P took it far below 850. Some were even talking S&P 500! However, with the earnings season in full force and the banks meltdown fear put to rest the market seems to have concluded that a proper S&P multiple should put it north of 850 and the question is exactly where it should go? Dow 9000 and S&P of 950 represent a fair valuation for the market if and only if we believe that economic recovery is taking place and that future earnings prospect justify such a level on the Dow and the S&P. There are many green shoots and mustard seeds (as a CNBC host calls them) that one can look at and conclude that such levels are plausible. As far as I am concerned I only see a trend and the trend is bullish until it ceases to be not so. So the near term course of action for traders is to continue to ride the bull until it stops to take a breather.

But of this I am sure -- there will be no correction, no pullback, for those of you that missed the rally to get back on the bus. The reason it won't happen is 1> because the previous market hyper lows were driven by rumors and falsehoods that the banking industry was on the verge of a collapse which has proven to be simply not true and 2> it won't happen because so many expect and want it so that they can get on the bus to take a ride that they missed. Everytime the market pulls back a bit there is a section of those that missed the ride that will jump on the bandwagon sending it higher so chances of a real pullback are slim to none. If you sit and watch the buy and sell programs hitting the NYSE you will notice that everytime a sell program of reasonable magnitude hits soon there is a buy program of even higher magnitude that hits sending the indices back to their levels or even higher. This tug of war only dictates that the Dow and S&P will power higher and the real pullback will begin to happen once they have breached what the market thinks are fair valuation levels. So if the fair valuation levels are around Dow 9000 and S&P 950 then quite possibly the markets may breach these levels by 5 to 10% and then pull back to these levels but not pull back to the previous market lows from the current levels.

Apr 19 12:20 PM

[E Nuff Sed:]

If earnings over the next couple of weeks continue to "surprise" on the up side then any pullback will be short lived. While it likely that the first 3 - 4 weeks of this 6 week rally was mainly powered by short covering I think the final 2 - 3 weeks has "smart money" moving in. The On Balance Volume line of the S&P 500 has again turned steep in the last 2 weeks confirming the trend.
Lot of institutional money is quite anxious to get it and will be looking for a pull back.
Of course the economy is atrocious. Therefore I think it still makes sense to remain defensive. Healthcare and Consumer Staples has mostly missed this 6 week rally and remain at very attractive valuation. I am rotating out of financials and materials to staples and healthcare to ride out the correction.

Apr 19 12:29 PM

[Esol Esek:]

Technical analysts or fibonacci curve guys didnt predict the market armageddon of 08 that first showed signs in 07 - it was guys that did straight economic analysis, and included common sense, and past experience about asset bubbles learned not that long ago in the tech craze.

Many fundamentals about this economy are yet to be resolved. We dont know where GDP is headed, or unemployment's feeding into the cycle, and there's no reason to believe housing will get any better, and with the govt pretending housing is still worth 97 cents on the dollar, the banks are living on hot air. Throw in other things like reduced govt taxes, consumers buying the least since WWII, and boomer demographics/panic, and you have the recipe for armageddon still around the corner, especially when the market, and the public get wind that no, the FED wunderkind couldnt stop the disaster. Plus, any day a giant scandal involving Goldman Sachs, The Fed, Congress, and Obama could result in a circular firing squad Wall St will not enjoy. Lets not forget Europe is near detonation as well.

it doesnt take much analysis to think, yeah, things are gonna suck a lot harder from this rotten egg.

Apr 19 03:43 PM

[RiskReturnO...:]

I like to buy insurance (using puts) on the sector ETFs that are most overbought (for those who are more comfortable with technical analysis), or sectors that have fundamental reasons that should have never participated in the recent rally.

If we believe we are at a near term top, and next 2-4 weeks might be correction of 5-10% for the whole market (SPY), I would buy puts on the IYR (for those concerned about commercial real estate), XLY (consumer discretionary -- in case April unemployment touches 9%, savings rate keeps increasing, scaring off the market), V/MA (for more aggressive portfolios only -- Chase and Citi reported terrible credit card spending numbers for Q1; unless V/MA's debit card growth rates can increase, I'm not sure current valuations are sustainable ... earnings are out end of April), XLB (materials ETF, in case the China growth / copper restocking story gets tired ... FXI and EWZ both closed down on Friday, something to watch in the next few days).


On Apr 19 12:00 PM MarkitWacha wrote:

> Do you think the VXX ETF is the best way to buy insurance, or would
> you just buy the put options on SPY straight out?

Apr 19 06:49 PM

[Bruce Pile:]

If you think the rally has legs, adding long positions at this point may best be done with limit orders that would be triggered at about where a 10% pull back would put the stock. A pull back may be very brief.

Apr 20 12:03 AM

[Freya:]

On April 19th, I made the comment above about LME copper inventories.

I had expected them to drop to 440 thousand tonnes by the end of April, I was wrong. They reached that level by April 24th.

Copper inventories are supposed to be declining because Mines have been shuttered???

Say what?, again please? Copper inventories at the LME may not increase because of mine closings, but they are not going to drop unless someone is taking delivery.

Apr 25 02:39 AM

[Freya:]

Dow went from around 14,200 to 6,400 or a drop of 7,800 points, I don't really see how a rally of 2,979 or .382 times 7,800 strains the imagination.

It should not be a surprise to Fibb. users, anyway.

Apr 20 08:11 AM

[Freya:]

Esol: DOW theory proponents and TA users both recognized the Bearish H&S signal of 2007-2008.

What they did not expect was the magnitude of the drop. The projected downside should have been no lower than around 11,000. It held that level briefly.

But then the Government came in to panic everyone with an Armagedon scenario. Intervention, forced Banking mergers, the Lehman collapse and the Forced Selling by Hedge, Mutual funds fueled by redemptions exacerbated the situation. It became a falling knife which took on a life of its own.

The TA people got it right initially. What they didn't realize was the Magnitude of the Stupidity arising from a simple statement: "No one is too big to fail".

The Government let Lehman fail and the crap hit the fan, worldwide.

Apr 19 11:24 PM

[Freya:]

LME inventories of copper have taken a nosedive in recent months. They are now around 475 thousand tonnes down from the peak of about 548 TT.

Peak to mid 490s, small incease back above 500, big drop in last 10 days to 475. If this pace were to continue for rest of April, the Inventory will be off 20% from its peak.

It will be noticed, I wouldn't be short just yet.

Apr 19 11:00 PM

[Freya:]

I expect the January high to be revisited before the Next punch to the Downside: DOW above 9,000 and SPX in mid 900s.

From there, just when you think its safe to go into the water, the Bulls will take a poleaxe to the cranium and the Bears will roar one last time.

Mobius: look for the November lows to hold.

If the above scenario takes place, The DOW will exhibit a Classic H&S bottom with the Neckline above 9,000. The projected move (if it were to occur) would take it to the 12,000 area.

My conclusions are based only in part by charts, Tyler D. talked about program traders, yet considering the impact these trades have on the Overall market, I find it strange that no one in or out of Congress has even mentioned them. (Program Trades were averaging just above 20% before this move, now they are just above 30%. That's of total NYSE volume.)

Coordinated "Rosy" manipulation? If anyone believes this rally Strange, I would hazzard that I know how you would vote.

Apr 19 01:49 PM