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Odds that this is a 10% correction (and not just 5%) rise as tech stocks sink

posted on January 28, 2010 at 2:59 pm
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About a week ago, on January 22, I wrote a post called “So far this looks like just a correction” http://jubakpicks.com/2010/01/22/so-far-this-looks-like-just-a-correction/

I noted that the rally that began in March had been dotted with 5% corrections, but that we hadn’t had a good, hard 10% correction while it ran. This time, I wrote, the odds were that this correction was going to be of the 10% variety.

I think that’s even more certain today.

We started the week with two relatively weak up days—24 points up on the Dow Jones Industrial Average on January 25 and 42 points to the good on January 27—separated by a day, January 26, with a tiny 3 point decline, the U.S. market looks like it’s setting itself up for a continued decline.

What we’re seeing today, January 28, is a rotation away from risk and into safer sectors. Money is moving out of technology stocks—not surprising after disappointing results from Qualcomm (QCOM) and Motorola (MOT), basic materials and commodities (not surprising given the worry about China), and financials and into defensive sectors such as healthcare and consumer staples.

That’s a typical rotation when investors are expecting a further decline in the stock market. Such a rotation tends to be a self-fulfilling prophecy: the sectors now being sold are precisely those that investors use as a barometer of market direction.

Technology stocks down, they say, for example, means that the market is going down and so we should sell technology shares. Which, of course, leads technology stocks to fall some more. Which motivates further selling.

I think a turnaround will need to begin with China and the emerging markets. A recovery there would shift investors’ appetite for risk back toward the sectors that are falling now. (More on China, as promised, later today.)

I certainly wish that I’d held up on buying technology shares such as Intel (INTC) and Marvell Technology Group (MRVL) just before the correction (And boy, oh, boy, do I wish I’d sold Qualcomm before yesterdays stinko guidance), but I haven’t seen anything to convince me that the fundamental story that says this is the beginning of a multi-year buying cycle for technology companies is wrong.

When I posted “When to buy” http://jubakpicks.com/2010/01/22/when-to-buy/von January 22 I said it was okay to nibble on anything down 5% but that the correction had longer to run.

I’d modify that to say that I’d be willing to nibble on anything down 8% or so, but I still believe this is just a correction and that it does indeed have longer to run.

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2 comments

  • YX on 28 January 2010

    Jim:
    None knows exactly when and where the market’s absolute low, the lowest point will be. Don’t beat up yourself. As a daily reader of your blog, I am grateful for so many of your great advice.

    By the way, I sold another cold turkey of mine, QCOM when I had chance to break even. I am glad having done so and no complaint about buying INTC and MRVL either.

    Thanks, Jim!

  • andante on 3 February 2010

    Some have argued that part of the reason there was no bounce from the earnings reports even when they were good was because the stocks had run up a lot during 2009 and traders wanted to take profits on the good news. Liz Ann Sonders has recently downgraded tech to market perform in a contrarian vein but may re-recommend later in year if froth decreases. She is currently only overweighting healthcare. Semiconductors apparently still have room to run with demand holding up for: PCs, auto industry, high end phones and other electronics. Enterprizes are coming back into the market to replace hardware, China is projected to have 11% growth in demand and Indian mobile phone growth is taking off.
    The managers at Pimco (Bill Gross, et al.) say that the “New Normal” will be an extended period of “subpar” growth. As Jim has pointed out, debt is a big issue with a 90% debt to GDP ratio being a tipping point that is financially painful to recover from. We are there now. Higher growth will come from EMs. Although China is currently starting to pull back, some remind us that EMs are not defined 100% by China. As Jim has frequently pointed out, there are good opportunities for investment in Brazil, India, Indonesia, etc.. Hopefully this country’s entrepreneurship and creativity will help it find a new way and overcome this economic crisis.

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