I know this is painful.
Stocks, mine in the JubakPicks.com portfolios and in my own portfolios, are down. And it’s starting to feel serious. Stocks have dropped for four trading sessions in a row and for six of the last seven.
Since the decline began, small cap stocks have taken the worst of the beating with the Russell 2000 index down 9.2%. The damage to the NASDAQ Composite and the Standard & Poor’s 500 indexes is less but still substantial at 5.2% and 4.5%, respectively.
But so far this looks like the kind of correction–a drop of 10% or so–that punctuates most rallies. We just haven’t had a correction like this in the rally from th March 9 bottom. One of the big criticisms of this rally has been that it’s been too far, too fast and that it needed a correction to put in a new base.
Well, your wishes have been granted. This looks like exactly the kind of correction that rally skeptics have been wait for.
So far, though, I don’t see any fundamental change in the conditions supporting this rally.
The dollar still looks stuck in a long-term downtrend. That will keep alive the binge of dollar-denominated borrowing that has fueled this rally over the last few months. Economies around the world seem to be in recovery–even the United States is expected to show economic growth in the third quarter GDP numbers that get reported tomorrow. Earnings have easily beaten low expectations in the third quarter.
I still firmly believe that this rally faces a day of reckoning–just not yet. I’m skeptical of any rally built on central banks running their printing presses and I’m not convinced that the various economic stimulus packages produced by governments around the world have created sustainable growth. And I think that a reversal of the dollar carry trade when the Federal Reserve starts to indicate it will raise interest rates could pull the rug out from under both commodities and emerging markets.
But those are problems that I see developing in 2010.
We’ll know a lot more about the duration and seriousness of this correction after we see what know the market reacts to Thursday’s GDP numbers.
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I’m starting to like some PPO / SQM .. But don’t know if I’d do PPO before earnings on the 4th.
OH, WHAT WOULD I DO WITHOUT JAMES HOLDING MY HAND IN THE DARKEST OF THE NIGHT.? BE IN CD’S AT 2% I GUESS.??
NOW THERE’S A TICKER THAT WILL GIVE YOU SHIVERS IN THE MIDDLE OF THE NIGHT.!
POST SCRIPT:
THANK YOU James. from
an old rookie…
Jim,
For people following we have been trimming some positions and putting some cash on the sidelines. The commodity stocks have gotten hammered as well as overseas.
With EU not lending and the US putting up a big number I think we are seeing more worries that he carry trade will come to an end sooner than expected (early spring instead of late next year).
That in mind what positions are people looking to add to? I added to JCI on the fall and am looking back to adding RYN and KGC which I sold a few weeks ago. Some other candidates I like are MSFT and TC.
Fisher of the Dallas Fed and Feldstein just gave interviews on BNN that are worth tracking down where their assessment of the 2010 outlook is almost identical to Jim’s. Beyond that is a Risk On liquidity-driven rally IMHO where PE’s have gotten completely out of hand. That means that it could turn the other way at any time. NB: all of this week’s drops were ostensibly triggered by “surprises” in the economic news. Again I think a point JJ made earlier about people are saying they’re anticipating the weak recovery but their actions contradict that.
For some interesting takes from the FT, Bill Gross, et.al. you’ll find some links here:
http://llinlithgow.com/bizzX/2009/10/really_different_this_time_liq.html
Although I agree that this is a much anticipated correction, I disagree with the 10% base, as I think it has the potential to reach 12 – 15%. My current worry is we have a down turn like we did last year from Oct to March.
3.5 weeks ago I started weening off of some long stocks, and started pulling some pretty big profits, and have been buying and selling some in the money PUTs for Nov and Dec expiration. Obviously selling the PUTs for stocks I want to own.
I’m staying quite skittish on the current market as the S&P is trading at an insane P/E along with many stocks I’d actually like to hold.
With that said, I can’t be completely short, or completely long so playing some of the staple stocks that haven’t had the insane increases that the speculative stocks are my plays. One that I would be on par with Jim is WRB. Some others are JNJ, and I’m quite heavy with BIO (this I’ve been holding since march and have accumulated several times in the 50’s and 60’s along with the low 80’s.
I also like GLW, but it’s a stock that I think will correct quite extensively with the market, so I feel I got in a bit early, but have a long term view into late 2010.
Do your own Due Diligence, and remember invest with money you don’t “need” in the near term.
LOL, Tuesday might be a different story.
I wouldn’t worry about Monday overmuch, jerroldjay. A lot of institutional buying takes place every other Monday, this being one of them.
With the S&P closing below the 50 day simple M.A.
It looks lower to me. Lets hope this Monday isn’t a
Black one
Goldman Sachs just revised their projection of the 3rd quarter GDP down to 2.7% Wed morning, so theres a pretty good chance the official fed numbers on thurs will disappoint too, but maybe the GS revision is partially what caused the market to free fall today.
Its definitely painful, but I have gotten burned before trying to time the market. So thanks Jim for the vote of confidence. I will be patient and sit through it.
I think a 2.5 jump in the GDP number would be disappointing, but tolerated. A number lower than that and the markets could have trouble. We’re still seeing quite a bit of top-line misses and the cost cutting is responsible for a large part of earnings.
From a valuation perspective, we’re pretty close to fair value at around 1050 if you assume the 15 multiple and $70 to $75 next year.
I think we’re seeing money managers lock-in gains and rotate to safer, valuation and yield. That would explain the telecoms and defensive companies avoiding today’s drop.
While I don’t think we retest the lows or get anywhere even close to those levels, I do think we’ve seen the top until the economy shows more signs of improvement that can be sustainable.
Jim,
You’re not kidding that hurts. I have holdings in some of your picks, namely, POT, TSM, MSFT & TC. Do you think if there is a negative reaction to the GDP tomorrow it might be a good time to add to these positions?