What started as a mixed session quickly became ugly as President Obama announced a proposal to crackdown on the way major banks do business, such as ending their ties to hedge funds and private equity and severely curbing their risk/growth by banning proprietary trading. When taken together with the President’s intention of imposing a tax on the major banks to recoup the government’s losses from TARP (something even Warren Buffet is against), this has some institutional investors convinced that the government is now all too ready to kill growth in order to score political points. Naturally, all of this populist hyperbole in the highest circles of our government sparked a sell off in most of the big bank stocks: GS, MS, BAC and JPM.
It’s hard to imagine the market being able to continue this rally with the financials looking the way they do. Now, couple this with the fact that quite a few of the leading, high-liquidity stocks are presently living below their 50 day moving averages (PCLN, AMZN and GOOG – more on these below), and consider the miserable action in the smaller, high-growth Chinese stocks like RINO, CYD, HRBN, TRIT and CAAS, and take into account all the failed breakouts recently and you have some very high odds of an impending correction. No one can know just what type of correction it may be, whether tame or severe, or whether it may turn into something worse, or even whether it will definitely occur. There’s just no knowing. But we would be wise to remember the Two Great Rules of the aforementioned Mr. Buffet:
Rule #1: Don’t lose money.
Rule #2: Don’t forget Rule #1
We seem to now be in one of those markets where even good news is bad. China grew 10.7% in the fourth quarter of 2009. They declared that they had fully recovered from the global economic crises. Great news, right? Wrong. Why? Because growth that hot makes people worry about inflation, which makes them come to believe the Chinese government will do something to restrain the economy – namely, raise interest rates.
A company blows away earnings, handily beating the street’s estimates, and raises guidance. It’s bound to gap higher, right? Nope, it drops 5% on huge volume.
This kind of action is indicative of corrective/bearish markets. To fight it is futile. In fact, to even worry about news at this point is meaningless, unless you enjoy being completely exasperated. Now more than ever the price/volume action of stocks and the major averages should be your guide, this and nothing else; and to that point, we’ve now suffered 4 distribution days in the last 7 sessions. Historically speaking, that kind of selling is almost always a harbinger of corrections both large and small. So, if you haven’t already, you’d be wise to raise cash here. At the same time, seeing that we’ve had so many down days all clustered together, it’s somewhat tough to get too short right now. Also, with the NYSE (see below) and Dow just below their respective 50 day moving averages and the S&P 500 just above it, we can expect at least some support at these levels. The Russell (shown below) is also close to a support level.
Disclosure: No Positions