February 4th, 2010
Sovereign debt or jobs? That’s about all I heard from those trying to explain or, more correctly, rationalize today’s decline. What does it matter? All this conversation acts as a veil to diffuse the truth which is …. this correction was predictable. Better yet, it was predicted by many technical analysts (including moi) who looked at the difficulty the market was having crossing above the critical 1150 level (see “The Importance of S&P 1150 Can’t be Overstated” of January 19).
Those who headed the many warning of an impending correction over the past several months may have shielded at least some of their hard earned gains. Personally, I’m around 50% in cash and have put on significant amount of hedges in the form of calls on SDS, the double short ETF on the S&P 500 Index (as described in “Protect Yourself Against An Imminent Market Correction” of November 22). Unfortunately, the hedge has yet to kick in since I put them on at the end of November, just about the same level the market is at now.
With the market having declined about 7% from that call on January 19 and now rests just above the low of the 2004 correction, the proper question to ask is less “what caused the correction” than “how much father will it go”?
Using the domino analogy (“Market Dominoes Beginning to Fall” of January 26), my guess is that the market will test the support capabilities of the 200-day moving average, currently at 1016, just 5% further below current levels. If that domino falls, a new and different quandary presents itself. Crossing the 200-day moving average technically represents a flashing red light according to the Market Timing Indicator (haven’t hear anything about the MTI in some time!).
Should that come to be, by that time I plan to be only about 25% exposed to stocks with the remaining 75% in cash. And if the market stays below the 200-day moving average for more than a week or penetrates below it by more than 1.5-2.0%, it would indicate to me a high probability that even more serious declines are possible. Should that happen, I would have to revert to an all-cash position again.
I’m not predicting it but I am getting mentally prepared for the possibility. Shades of 2008 all over again? Don’t think so; hope not. But it’s better to be safe than sorry.