A Correction? Another headfake? My .02

Should I buy the dip? Should I blame it on lunar movements or is it another headfake? Will the Bears be punished once more and we head higher as we have in the past? Well for what its worth [which is zilch] I think we're in for a larger correction. Obviously I'm not a Economist or a Hedge Fund Manager [I wish] but I believe there are number of reasons we'll see *sell in May and go away* come to fruition this year.

  • First and foremost, spiralling Eurozone debt and the additional debt they'll have to issue to bring themselves out of the immediate crisis. The PIIGS are not dead and I believe it will take months for this to fully play out as the ECB does its best to drum up support for the Euro in the meantime. This fear alone has and will send some investors to safer havens such as currencies and bonds.
  • Then you've got to wonder where the ECB is going to get all of this money? Sure, turn on the printing press works but you know they're heavily invested in various markets and they could certainly use some of that money right now, couldn't they.
  • Seasonality not only in commodities but in the S&P itself due to capital gains. The more profitable or trending season according to Spectrum Commodities for equity markets being November to April and slightly less profitable May to October, The difference going back to the 1930s may be 10-17% depending on the index, but to big investors, 10% is substantial.
  • Earnings. So we've reported better than expected Q1 and Q2 and prices trended higher. At some point, these higher earnings [based on economic recovery] become *baked in*. There simply isn't much further to go based on earnings potential and eight [8] months left in 2010 the so prices must adjust and big business rings the register. What better time to take profits but just before the kid are let out of school, cottages are opened, the boat comes out of storage and Summer's on the horizon?
  • Recent guidance and earnings beats. Even Bespoke noticed that earnings beats are receding. Handwriting on the wall of what's to come? It's tough to factor in higher prices when forward guidance doesn't impress.
  • Valuation. Have you noticed the recent increase in downgrades to to overvalution? The ratings agencies are telling you something but were you listening?
  • Speaking of forward earnings; take a look. Are they substantially higher as they were over the last 12 months ago or slightly up to flat?
  • Then you've got talk of financial reform [which will probably amount to nothing useful whatsoever] and the GS invesitgation; both giving the Bears something to harp over.
  • Lastly and maybe most imporantly for the markets is the extension for US unemployment benefits. Extended 60 days retroactive to April 5th, these loom to expire the beginning of June with Congress [at least up to now] not enthusiastic of granting another extension. After all, how long can they continue to prop up the numbers? Now when/if these expire, how great do you feel the impact will have on consumer spending? Yeah, you know it. Huge. Of course they may pull another rabbit out of their hat but at $10 billion cost for each 30 days, its clear the extensions are numbered to say the least.

It all adds up to a lot of uncertainty and why I believe we're going to see further profit taking in the days or weeks to come. For the record I don't believe we're going to revisit the lows at this point [sorry Mr. Prechter] but certainly wouldn't rule out that possibility if something were to change with the stability of the Euro, USD or GBP. That would be a game changer in my mind, certainly.

So are all sectors going to pullback? Well possibly not. According to Spectrum, crude oil catches a bid in May/June due to anticipated Summer driving demand and Gld, while it tends to have some strength in May due to the impending June wedding season, it may see even more buying interest due to global economic concerns. Then there are utilities which have undperformed and even the Healthcare sector which has undergone a correction as well.

Other options might be to take a portion of your profits and invest into short term bond funds, Corporate bond funds and inflation-protected funds. Vanguard offers a number of these with as little as $3000 and all you have to do is perform a search on your brokers site.

Lastly there are inverse ETFs, many of which have decay issues so be careful if you're not daytrading but I personally will be ringing the register on my profitable positions on any green [up] day this week.

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  • Just for clarity, I meant Val would know the bond etfs. My statement could have been worded more clearly.
  • Admin
    There are certainly a variety of safe havens out there. Hopefully Val and other members will chime in with suggestions.
  • Kos, you have described a wall of worry. You have made some vaild points and I would certainly agree with you on most of them. However, I would wait until after the June Fed meeting before buying bonds or at least swap out weeks before. Just in case there's a rate change. Also, and Val may be more helpful on this front, there are bond etfs that will work for this strategy.
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