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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.


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!



4 Comments – Post Your Own

#1) On October 26, 2009 at 1:55 PM, EnigmaDude (58.51) wrote:

Just curious - why are you down to just 9 active picks in your CAPS portfolio?  Are you waiting for the latest correction to complete its cycle before adding new picks?

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#2) On October 26, 2009 at 11:17 PM, checklist34 (98.59) wrote:

enigma dude,

      Basically, my CAPs portfolio has been a loose approximation of my real portfolio, sort of.  I mean there are many differences including I never had a stake in BA but somehow wound up reccing it on caps in january.  I have a stake in it now from when it dumped after the 787 delay.  Also some cmpanies i've rec'd well above my average cost, some below, many i've simply forgotten, and so forth.


      Right now in real life, and this is reflected in the CAPs game, I have come to a bit of an impasse.  Stocks are no longer cheap (although they are also not irrationally expensive), and my portfolio is hedged and largely full, and I really haven't been buying all that many shares lately.

      Also, my preference in real life (thus reflected in the CAPs game as i've never made a CAPs game pick just to play the game) is to look for stocks that can appreciate by multiples, not by percentages, and I'm just not sure there are all that many out there right now.

      I think the picks i have open on the CAPs game right now represent good buys.  I've also gone long RIMM calls and short RIMM puts recently in the real world, my only new position in some time.  I took an options position in UNG but am in the process of closing it.  It was a profitable play, but I've ultimately concluded that UNG isn't the approrpiate vehicle.

      Basically I tend to think the market is a "hold" here, and my portfolio reflects that.

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#3) On October 27, 2009 at 10:17 AM, jinchoice (99.05) wrote:

I hear you on the lack of opportunity. I recently alphabetically went through some 300 stocks on the Amex exchange (most of them casually). There seems to be a real dearth of opportunity for American stocks. However, I'm still finding some bargains in the Canadian exchange, particulary the venture exchange that I recently perused. I think this is the result of less people being interested in Canada in general.

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#4) On October 31, 2009 at 8:35 PM, checklist34 (98.59) wrote:

hey jin, ...  interesting about Canada.  One of my biggest holdings is TCK, a Canadian company.

Opportunity in American stocks just got alot better (over the last week)...  another week like last week and there would be bargains aplenty, just like July. 

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