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Sumeet Vatsa
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I have been investing for over four years and have gone through booms, busts and flat cycles of the market. Yep, decent experience in short duration. I am an avid student of market and analyze almost all of the trades that I make, especially the ones that go belly up. I have gone through the... More
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  • Deja Vu! 0 comments
    Apr 9, 2012 12:04 PM

    Before we move forward let's review the market -

    If you look at the half-hourly chart of S & P 500 for last few weeks you will observe a lot of indecision. This can stem from a market that is awaiting a jobs report or the one that has rallied almost 25% since October bottom but bumping into some bad data or a market that is just waiting for earnings to come out. This is a typical sideways movement that needs just one or two catalysts to either jump up or break down.

    Till Friday morning, we were all hunky dory - raising toast to the best quarter since 1998.

    But by now, you guys must have heard, read and pondered about the jobs report that came out on Friday morning. Entire market was expecting creation of 205000 jobs with lowest estimate being 193K but to everyone's disappointment the number came in at 120000. This is exactly the catalyst that I mentioned above. Following is the S & P 500 futures -

    Going Forward -

    The question is where are we heading from here. Let's look at the slightly bigger picture -

    We will definitely get temporary support at 1375-1370. But that floor might not last long if Alcoa comes out with bad numbers on Tuesday after close. I personally expect the floor to crack on Monday itself. This market might turn into a sideways market or 5-7% correction if this is just one-off jobs miss and not a trend.

    The real correction will start if -

    1. We get more of such job reports.
    2. The companies fail to meet Q1 numbers.
    3. Manufacturing margins start contracting.
    4. The inventories start piling up.
    5. Europe's problem resurfaces.
    6. Israel goes after Iran.

    All these events individually have the capability of turning a flat market in to an intermediate/full blown correction. A correction that can go beyond 12-15% - That's spooky.

    In terms of technicals if we fail to hold on to 1336, we are looking at lower lows and lower highs. This means that we are in correction. The breakouts will fail, the industrial sector & commodities will sink and we will stare at repeat of 2011.

    Deja Vu!

    There is a stark resemblance between job numbers & rally at the beginning of 2011 and the similar macro economic data points in 2012. All of them fizzled out, making 2011 one of the worst trading year in last 20 years. In case 2012 tries to follow the suit of 2011, I suggest that please sit on the sidelines unless you are nimble (like really really nimble) or you are willing to take 15-20% loss or you want to buy stocks such as QCOM,APA, EMC, etc for long-term. The top traders have always said that it's good to sit out when market goes sideways and hop in when the direction is confirmed.

    This is the kind of summer where I would use the old adage -"Sell in Summer and go away".

    Question is why side ways and why not a full fledged correction?

    Never underestimate the Printing Press. One off job report might not bring back QE3 from dead but few of such reports will definitely get Feds going.

    Lastly what do we do with current portfolio?

    As not all fingers are of same size different kinds of stock in a portfolio deserve different treatment.

    1. Such reduce all the momo stocks such as LULU, ALLT, SCSS, TPX, HLF, ULTA, CLR, ALXN, etc to 1/3 of original position. A risk averse investor might sell all. The reason is the panic grips the owners of such stocks with higher multiples faster than does the rest of the market. Just a reminder, small cap stocks corrects more than larger cap stocks during a correction.
    2. Stick with oldies such as HAL, APA, STX, WDC, PG, COV,etc unless the fundamentals show a major shift such as margins contraction trend,etc. Some of them have already seen fair share of correction.
    3. To defend your portfolio you can buy long term US treasury bonds such as BLV, TLT, etc. They tend to be haven during such corrections.
    4. A very active trader might try putting in shorts such as SH, HDGE, RWM, etc.
    5. Keep an eye on the leaders of this bull and see how they perform during the correction. By leaders I mean - AAPL, ISRG, CMG, SCSS, ULTA, LULU, TSCO, FFIV, etc.
    6. Start running scans to look for stocks with excellent fundamentals that are holding up well. They might be the future leaders.
    7. Lastly add to your existing value positions or buy new ones (after fishing for course) after market has gone corrected by 10%. But remember an oversold market can become more oversold!
    8. Again, In case 2012 tries to follow the suit of 2011, I would suggest that please sit on the sidelines unless you are nimble (like really really nimble) or you are willing to take 15-20% loss or you want to buy stocks such as QCOM,APA, EMC, etc for long-term.

    I believe that capital preserved is the capital created for future investment opportunities.

    If you are really, really lost, I will talk more about correction, handling of stocks during corrections and going short later on in the week.

    Themes: Market overall
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