Winds of Change: Harbingers of Correction Emerging

Give credit to the bulls. For the last six months, most economic indicators and corporate earnings in aggregate have been in their favor. Economic data has become less and less bad, and many companies have either beaten lowered earnings expectations or achieved trough earnings (at least in the near-term). For example, the ISM Manufacturing Index has been in an uptrend since bottoming in 4Q 2008 and is now at 52.6. As far as earnings, it really did not matter what companies reported or guided in 1Q 2009 or 2Q 2009; both positive and negative news were bought based on the widespread belief that the bottom was close.

However, in the last couple weeks, chinks in the armor may be appearing. Economic numbers are more frequently coming out lower than expectations, and reactions to recent earnings and guidance have shown that investors are now willing to sell. This increase in less than stellar data and investor reactions should be monitored. If this pattern continues, a tipping point could be approaching. As we all know, the market does not ring a bell at the top or bottom. Ultimately, additional information and time will tell. But for now, the latest observations do suggest that a pause in this tremendous bull move from the March lows could be forthcoming.

Economic indicators less than expectations:

Subpar reactions to earnings:


Disclosure: No positions in companies mentioned.

Comments

[market ace]

You bet a correction is on the way. With the S&P P/E at around 130 and third quarter earnings no longer "better than expected" because of reduced labor costs a little reality may just set in.

I am a firm believer in the theory to put a small trailing stop on all stocks and when you are all in cash you will know for sure that the the rally is over.

Then all you have to worry about is your cash becoming trash as the purchasing power of the dollar sinks long term. Some precious metals and realted stocks may not need stops and some buying may be in order..

2009 Oct 01 01:25 PM

[MikeX]

What correction? The crash is going to worse than Great Depression! The problem is too big to solve. Housing numbers are a death spell for the economy! Buckle up, we are going down fast. Home sales are the engine of this economy! When we borrow, banks create new money. They do not lend existing money.

Here is how banks create money:

www.tradingstocks.net/...

New money makes the economy good. Whatever good days you have seen in your life was because people borrowed more and more exponentially! Read about the way government and the FED uses home sales as a way to create money and inject into economy:

www.tradingstocks.net/...

This is why the government is trying to propel the home prices up again! They don't want affordable housing! They want EXPENSIVE HOUSING. Home prices MUST go up and we MUST keep buying faster and more to sustain the fake recovery. That is not happening. The crash will be worse than Great Depression. Some are shorting the market:

www.tradingstocks.net/...

Deflation is a MAJOR threat now! All the money FED prints is not making a blip in inflation! There is still a bubble in housing and stocks. It is a bubble that was inflated for 50 years! make no mistake, it will deflate.

www.tradingstocks.net/...

2009 Oct 01 02:13 PM

[Donald Ingram]

Whats wrong with this picture: Insider selling continues at a brisk pace. Almost no insider buying - its all on the sell side.
Duh! This says to me - jump quick! Before you go down with the bulls!

2009 Oct 01 03:19 PM

[Roger Knights]

"As we all know, the market does not ring a bell at the top ...."

Sometimes it does. Last Tuesday SPY made a doji star at the climax of an up-move (reversal signal), followed by a key, or outside, reversal day, followed by two confirming down days, followed by a failed two-day rally (lower close on day 2). Some of us noticed and posted about it.

This isn't just a twitch in the trend. This is the bend in the end. Get out now.

2009 Oct 01 03:24 PM

[Raymond Chung]

I hear the doji star day. Though in the following 2 days existing home sales and durable goods missed optimistic expectations, and RIMM got punted. Certainly these factors also contributed to the ensuing market weakness.


On Oct 01 03:24 PM Roger Knights wrote:

> "As we all know, the market does not ring a bell at the top ...."
>
>
> Sometimes it does. Last Tuesday SPY made a doji star at the climax
> of an up-move (reversal signal), followed by a key, or outside, reversal
> day, followed by two confirming down days, followed by a failed two-day
> rally (lower close on day 2). Some of us noticed and posted about
> it.
>
> This isn't just a twitch in the trend. This is the bend in the end.
> Get out now.

2009 Oct 01 04:09 PM

[thiazole]

Yes, we are almost certainly a few days past the beginning of a correction, but it won't be very severe. I called this one last week seekingalpha.com/user/... (I also called the June - July correction as well and got my patented "thumbs down for daring to make an accurate prediction": seekingalpha.com/user/...). This correction will look a lot like what we saw from mid-June to mid-July - an mild opportunity for sideline money, but not the doomsday the bears are imagining. Also keep in mind that I'm not a broken clock who is ALWAYS predicting a correction (unlike most of the posters above).

I believe that we will have a more severe correction within the first 6 months of 2010, but this isn't it - and I expect the market to rally hard in Nov-Dec which will more than erase whatever small losses we get here.

2009 Oct 01 04:26 PM

[djc]

Which meant that someone knew about hte data before it came out ? NAAAH ! SAY IT AINT SO !


>>I hear the doji star day. Though in the following 2 days existing home >>sales and durable goods missed optimistic expectations, and RIMM >>got punted. Certainly these factors also contributed to the ensuing >>market weakness

2009 Oct 01 04:30 PM

[jerrydd]

We are in another mini bubble caused by brokers, etc who want to churn so always say the market is going up. Markets need to drop 15% or so to be close to real value.

Sadly because repubs, oil, coal dems won't let us became energy independent next yr as fossil fuel prices skyrocket, will throw us back into recession.

2009 Oct 02 12:41 PM