Now We're Really Due for a Pullback

I'm afraid to blow it again. Twice I've called the end of this rally or at least a pullback and was dead wrong both times. But.

We see different reaction to the news now. Last quarter earnings were met with a "buy, buy, buy" reaction, whether earnings were good or, more often, not so good. Now, earnings are improving and I can actually see real growth in some reports, but every company gets killed. With the exception of Google (GOOG), which reported an outstanding quarter. I'm going to write more about Google later. But the fact that very good earnings from Intel (INTC), IBM (IBM) and Goldman Sachs (GS) were met with sell-offs is telling.

Another point: Sentiment is becoming more bullish now. If I understood Todd Harrison's last missive right, he's not bearish anymore. That's telling. Would be even better to see Doug Kass bullish, but I don't think so.

I thought that rally in July-September was a buying panic. I still think so. Looks like the panic is over and window dressing finished in September. We are due for a pullback. How big is it going to be? Nobody knows.

Short term, I'm tempted to play earnings. I know it's a sucker's game, but the temptation is too big. Medium term, I'm waiting for a 10% pullback. Because I'm bullish long term (defined as 18 months in my case), I'm buying such pullback and buying even more if the pullback goes deeper. And of course, I want to take some profits.

Right now, I want to buy Intel. Jim Cramer is absolutely right: any company running 63% margin is a buy. Apple (AAPL) is tempting for a trade.

Full disclosure: at the time of publication author had a long position in GOOG and no positions in other stocks mentioned. Positions can change any time.

Comments

[noob:]

I don't think there is that much incentive to pull back. Hitting the 10,000 market has created a great psychological achievement in the economies image of a recovery with long lasting implications. I said Image, not fact. After all, by the numbers we have risen to pre-crisis levels.
Meanwhile the dollar falls consistently. Almost as consistently as the ups and downs of the Dow. Dollar goes up, Dow goes down. Dollar goes down, Dow goes up. Same with the price of Gold but with a subtle undercurrent of always going a net "up".
The inflationary pressures of a falling dollar are so great that we are able to achieve 10,000 on the Dow, yet the net worth of the Dow is almost unchanged since March through the currency failings of the US.
Comparing the Dow to the price of Gold and we are in a far nastier spot than we were the last time the Dow was at 10,000.
There will not be any significant pullbacks on the Dow for a while yet. And when it does happen, the pullback will not be in the Dow directly but in the currency -- leading the net purchasing power of the Dow into a pullback. But the numbers on the bottom of your screen will not show that.

Oct 19 07:11 AM

[richjoy403:]

Alex has expressed my thoughts also. I am concerned the trees are growing too close to the sky, and a correction is due.

The problem these last 6 months has been that the bears keep turning to bulls, and buying on dips; thus limiting the corrections to 4%.

I'm using moving stop limits (generally 8% from last closing high) on everything, and trimming some of my more speculative stocks (e.g.; banks), as these would probably fall the most in a correction. I'm still bullish, but getting more cautious as we move higher.

Oct 19 08:25 AM

[redbaron:]

Think, 'Wall of Worry'.

Oct 19 08:27 AM

[TurtleTrader72:]

The diamonds (DIA) look to be headed to 'fill in' the down gap created back betwen 09/29/2008 and 10/06/2008 on the weekly charts. If it does that would take the DOW to about 10300. Some chartists may have noticed a similar down gap created during the same time on many other market ETFS such as SPY and QQQQ. Both SPY and QQQQ have already retraced back to fill this gap and now it may be DIAs turn. I do believe that we will see 10300 on the DOW over the shorter term. However, these trading characteristics also show that technology stocks have the most relative strength and our leading this rally. The next major resistance level on the NASDAQ sits around 2250.

Oct 19 09:08 AM

[Joe Shareho...:]

Pullback will come eventually, and sharply. Now is the time to be concerned about banks. Without actual economic improvement AND revenue growth rather than simply, "less-bad" it will be tough for banks to remain bullish with so many foreclosures looming. An estimated 3 million homes are pushing 60 day late payments. Without the availability of credit, this could get ugly fast. JPM reported excellent earnings, but they are simply an extension of the Fed. Look at all the other banks that have reported. Nothing much to see here.

Oct 19 09:10 AM

[Tomcat101:]

If you say the market is going down and keep saying it, eventually you will be right, but that doesn't make you Nostradamus.

Oct 19 09:24 AM

[robert.b.fe...:]

Large banks are raising interest rates on most of their consumer lines of credit and profiting handsomely since they pay almost nothing for the money they lend. That being said there will arise the need to shore up the dollar and the party will end eventually and badly. With commercial real estate set to come unglued and no real recovery in residential real estate or consumer spending some folks will be left with out chairs when the music stops. 8% traveling stops are my preferred method as well. Good article hat tip to the author.

Oct 19 09:39 AM

[David Van K...:]

One day, this prediction will be right. But let's look at some facts instead of opinions presented as facts.

(1) "Now, earnings are improving and I can actually see real growth in some reports, but every company gets killed." Q4 earnings season started on October 1. As I write this, the S&P 500 is up 3.7% since then. What companies are getting killed? A few here and there, but obviously overall, the market has reacted positively to what it has heard.

(2) "Sentiment is becoming more bullish now." As measured by what? The Reuters/UM Consumer Sentiment Index reversed direction and fell to 69.4 from 73.5 in October.

(3) "Looks like the [buying] panic is over and window dressing finished in September. We are due for a pullback." Lots of people believe this, of course, but it is opinion, not fact. What does "due for" mean, anyway?

My point is, anyone can write an article saying they think X and Y will happen because of Z. But if Z is itself an opinion, not a fact or something that will actually cause X and Y, what you have is punditry, not analysis. Fun to read, maybe, but the equivalent of a tip overheard at the water cooler.

Oct 19 11:14 AM

[richjoy403:]

I have been critical of SA on occasion (like when I find opinion has no, or incorrect, basis in fact). I realize that could present a fine line to some. Sometimes I wonder if the authors really have something worth saying...or only have a deadline to meet; resulting in whatever pops into their heads. This does not apply to Alex.

However, I also expect punditry, and in fact find it useful.

(I generally find John Mauldin too bearish, but I do respect his opinion and acknowledge the wisdom in reading those I disagree with).

Oct 19 11:44 AM

[BeachRider:]

I agree with others, be wary of situations where people have predicted 10 of the last 2 price-pullbacks. Unless the USA goes back into recession, there will continue to be some 'winners' (and losers). Right now, the weak dollar puts USA exporters into a good pricing situation. Financials will continue to recover, so long as real-estate recovers (a separate thing from stocks). I wouldn't look for over-inflationary stock-pullbacks until unemployment gets significantly better.

Oct 19 11:51 AM

[Donald Ingram:]

"goes back into recession"? "weak dollar"? "Financials continue to recover"? Wow!

Recession is still here. Not as worse is not recovery. The rug has been pulled out from under the USD by Washington, and they are waiting for the trap door to open. The banks are no where even close to admitting publicly, that they have a balance sheet problem, let alone taking any affirmative action aimed at genuine recovery.

No. I'm afraid anyone that swallows such 'horse hockey' is in for a big surprise. When the correction arrives it will be quick, decisive and violent. The bull trap continues to build.

On Oct 19 11:51 AM BeachRider wrote:

> I agree with others, be wary of situations where people have predicted
> 10 of the last 2 price-pullbacks. Unless the USA goes back into recession,
> there will continue to be some 'winners' (and losers). Right now,
> the weak dollar puts USA exporters into a good pricing situation.
> Financials will continue to recover, so long as real-estate recovers
> (a separate thing from stocks). I wouldn't look for over-inflationary
> stock-pullbacks until unemployment gets significantly better.

Oct 19 01:13 PM

[GigMaster:]

Next time, why don't you just use darts to predict the next market move? This article is just full of guesswork and no real data to back it up.

Oct 19 01:24 PM

[BeachRider:]

Mr. Donald,
The terms that I used were not arbitrary. Once the USA GDP stopped dropping, the 'recession' was over. Nor did anyone say that not-recession equals 'recovered'. You use of pejoratives is not clarifying your position (trap door, etc.). The Fed has certainly increased 'M1', but it has not resulted in inflation (yet). If they can ratchet up the interest rates and continue to collect (with interest) the TARP (which has certainly been going on), then the dollar will go up.
As to the banks, it is all about real-estate valuation. Precipitous drops will certainly put more-and-more banks at risk. Slow climbs will get the financial righted.
I think that many people cannot believe that a capitalistic system can survive the Multi-Trillion-dollar run-on-the-banks that happened 10-16 months ago. They are 'certain' that abject failure of their system was assured. Perhaps those assumptions need to be examined to ensure that the problems are being addressed and NOT presume that the problems cannot be addressed.

Oct 19 03:52 PM

[Alex Filonov:]

Thank you for your comments.

To David Van Knapp: Sentiment I'm looking at is investment sentiment. I have my own unscientific gauge: number of bulls vs number of bears on CNBC.

For those who looks for real data supporting my thoughts: if stock market was always moved by real data, everybody would've made a fortune. Doesn't work this way. I'm trying to look at shifting picture with shifting goalposts and make some predictions to make myself some money.

Yes, I know: "Never make predictions, especially about the future". It's quite probable that I'm wrong.

Oct 19 06:16 PM

[mrxg4:]

"Would be even better to see Doug Kass bullish, but I don't think so."

Alex, isn't Doug Kass a contrarian by nature? I don't think he'd jump on the bullish camp with everyone else. Isn't being contrarian of a contrarian just following the herd?

Oct 19 07:58 PM

[richjoy403:]

I know someone here will be quite pleased to correct me if I'm wrong...but as I recall (and I do read Doug Kass), he is presently looking for a correction; but he has NOT retracted his call in the spring that "the market had reached a generational low".

One of the reasons I respect the views of DK is that he has skin in the game (unlike so many others making predictions).

Oct 19 11:31 PM

[richjoy403:]

Re Doug Kass
I know someone here will be quite pleased to correct me if I'm wrong...but as I recall (and I do read DK), he is presently looking for a correction; but he has NOT retracted his call in the spring that "the market had reached a generational low".

One of the reasons I respect the views of DK is that he has skin in the game (unlike so many others making predictions).

Oct 19 11:35 PM

[Alex Filonov:]

Apology: Todd Harrison is still bearish, I misread his post on Saturday.

About Doug Kass: he called generational low in March (I agree with him here), but for the last couple months he is calling a pullback and weak market after that.

Oct 19 11:45 PM