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Is The Sky Falling Again?

Daily State of the Markets
Friday, October 12, 2012

Good morning. Do you feel it? Is that a twinge of doubt starting to creep in? Is your stomach starting to hurt just a little after a day like yesterday? Does each and every successive intraday failure cause your anxiety level to move upward in an exponential fashion? Do you find yourself wondering why oh why does everyone on the planet want to sell shares of Apple (NASDAQ:AAPL) and/or Google (NASDAQ:GOOG) day after day (after day)? Does the fact that your portfolio hasn't had a good day in what feels like a month make you want to sell everything and throw your stapler through a screen or two?

If you answered yes to any of the questions above, congratulations, you are indeed human. With stocks having had five, yes five, straight gosh awful sessions where it seems that every green bar on my one-minute chart of the S&P 500 was instantly met with another burst of selling, you can't be blamed if your angst level is rising. This is what corrective phases do. And the emotions of this type of environment are the reason the average individual looking to "trade" tends to wind up bombing out.

Yes fans, THIS is the hard part if you are holding any long positions. And frankly, why wouldn't you be holding long positions? After all, the stock market is up nearly +14% on the year. And even after the recent sloppy period, the S&P has enjoyed a +12.1% increase since June 1st. Then there is the fact that Ben Bernanke has promised to keep buying bonds until unemployment comes down and his counterpart across the pond appears committed to keeping the Eurozone from imploding. The economy is growing - albeit not a swiftly as anyone would like. Inflation is low. Corporate America seems to be finding ways to make a profit. Stock market valuations are fair (or at least not overdone). And then if my calendar is correct, the best six months of the year for the stock market are about to begin.

But to hear the bears tell it, we should all be shaking in our boots right now. The "fast money" types are on T.V. telling us we should be short the market (of course they are - and they top-ticked it to boot!). The technicians say a break of support that is oh so close will be problematic and represents a reason to take cover. The pundits tell us that the earnings season is going to be a disaster. And the intraday action in AAPL yesterday tells tape watchers that the sky is indeed falling this time.

But let me ask you something... Just who are these so-called "experts" that seem to get every single wiggle and giggle in the market correct? To me, it seems that the financial news networks focus on the next "trade" each and every day. As such, the hosts breathlessly ask their guests "How do we make money on your idea?" And as such, many of the "fast money" types that grace the airways either run or in many cases used to run, hedge funds. And let me ask one more question here... just how are those "fast money" hedge funds doing this year? Oh, that's right, according to Hedge Fund Research in Chicago (the group that tracks just about every hedge fund index on the planet) hedge funds are lagging the stock market badly again this year.

And what about those bears that seem to be everywhere these days, whose sole task it seems is to scare the heck out of you? How are they doing with their prognostications about Europe imploding and taking the global economy down with it? If memory serves, the current song being sung in the bear camp is the exact same one that they were singing at the beginning of the year - you know, before the stock market rallied to new bull market highs.

But to be fair, the bears have certainly nailed it over the last three weeks. They appear to be correct that the QE3 rally didn't last and that Super Mario's plan to save Europe didn't produce much in the way of stock market gains. But the bottom line is that, so far at least, the that's-my-story-and-I'm-sticking-to-it bears have managed to knock the S&P down -2.25% from its September 14th high. And while it is indeed true that the NASDAQ and Smallcaps have fared a bit worse (the NASDAQ is off -4.19% and the S&P Smallcaps are down -4.83% from their respective highs), from where I sit, the last three weeks appears to be a run-of-the-mill corrective phase.

Yes, the corrective phase can certainly continue from here. But unless we start to see some serious negative catalysts, I'd be willing to bet that this thing is closer to being over than beginning. And now that I've poked the bear so to speak, I won't be too terribly surprised to see the S&P break down and almost immediately test the next support levels at 1420 and 1400. After all, Monday IS coming!

However, my main point this morning is that corrections are part of the game. If you want to get the big gains that can be had in the stock market, you are going to have to endure some pain and suffering in the process. So, while the bears could certainly be right this time (in which case, we will play the game accordingly with our risk management strategies), don't lose your head during these sloppy periods - unless of course, the sky actually is falling this time.

Turning to this morning... Bank earnings are in focus this morning as JPM exceeded expectations on top and bottom line while revenues at WFC were below consensus. Stock futures are once again modestly higher in the pre-market, however, early gains have meant little this week as intraday selling has been the theme. This is definetely something to watch for today.

On the Economic front... We'll get reports on PPI and University of Michigan Consumer Sentiment this morning.

Thought for the day... Laughter is great exercise - it's like jogging for the soul...

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Shanghai: +0.10%
    • Hong Kong: +0.65%
    • Japan: -0.15%
    • France: -0.11%
    • Germany: -0.12%
    • Italy: -0.05%
    • Spain: +0.34%
    • London: -0.13%
  • Crude Oil Futures: +$0.18 to $92.25
  • Gold: -$0.90 to $1769.70
  • Dollar: lower against the yen, euro, and pound
  • 10-Year Bond Yield: Currently trading at 1.683%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +5.56
    • Dow Jones Industrial Average: +41
    • NASDAQ Composite: +5.14

Positions in stocks mentioned: AAPL

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Disclosure: I am long AAPL.