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Although the S&P remains high, we have seen considerable correction

October 26, 2009 – Comments (4)

Although the S&P 500 remains high, we have seen considerable correction in many stocks.  This is a pattern that has played itself out previously in the market since the march bottoms and the others times it preceded a move up.

The S&P remains very high, at 106X, thas higher than it was when I began reducing my long exposure by hedging with options.  I was underwater, often badly, on those hedges at times in the past 2 months.  I am now surprised to report that I am up on the vast majority of them. 

Whats happened is that the market seems to have exhibited some rotation, with big cap names holding up while alot of the small cap names that had gotten crushed in the downturn retracing a substantial amount of their gains.  

Financials have underperformed in the last 6 weeks, and banks are in the slaughterhouse today. 

Casinos have retraced considerably.

Insurers have retraced.  

Homebuilders have retraced 50% of their gains since july.

Etc.

This type of move was seen in May and late June/early July as well.  The markets were  not beaten up all that severely, the peak correction from May highs to May lows was just 5% but many individual names retraced 20+ percent, in general these were the small cap names that had advanced the most since the bottoms.

The early June to early July correction saw the S&P correct less than 10 percent, but many individual names retraced by 20, 30, even 50%.  It was these names that were weak during the correction that led the charge up through July and August.

Now we are seeing a market that has corrected just a few percent from its recent highs, but mixed in and among that are considerable retracements (often starting from August or September) in many individual names - specifically many of the names that have moved up the most from the bottoms.

This is not a predction that a rally is imminent or that this correction cannot carry on much farther (it certainly could), but...The last two times we saw this kind of churning and retracing even as the market largely levitated it set us up for moves to new highs, with the retraced small caps leading the way.

Also, the market has been weak through this earnings season despite results that were as favorable as the last earnings season.  Maybe market strength into earnings is a "sell" signal, implying that expectations have gotten too high?

In December, the market rallied considerably even as economic news became ever-more grim.  In late February the market tanked incessantly even as economic news became more positive.  I have been struck at times by the thought that whent he market starts to move opposite of the tide of news that a turn soon follows.  This time around we may have a setup where the recent negativity and volatility is in the face of what seems to be still-improving conditions.

There is no prediction nor grand nor brilliant point here, I just offer that we may be setting up for another move to the upside if the market does again whats its done in the past.  

If you want a prediction, I'd wager that we move back towards 1030-1050 with small cap names that have moved up the most and financials taking the brunt of the beating in the short term.   If it happens, prepare to buy!  And consider buying what has been beaten up the most.

happy hunting!