Monday, May 07, 2012

How Deep Will The Correction Be?

The markets are slightly lower in early trading, although the Nazz is trying to buck the early weakness and go positive as I write.

The news over the weekend mostly centered around elections in Europe.  In France, the Socialist candidate  (Hollande) was elected over incumbent Sarkozy.  And in Greece the elections also point to a political shakeup.  So especially in France investors worry that the austerity plans in the eurozone could be in jeopardy, and the Franco-German leadership will likely lose one of its key leaders.

Overnight action in Asia was lower across the board, with Japan and Hong Kong down more than -2.5% each. 

The dollar is higher today, which is also weighing on commodities.  Oil prices are lower near $96.60 and gold prices are lower to $1634.

On the earnings front, this morning's big disappointment comes from a stock we really like, CTSH.  The company beat estimates but lowered revenue guidance for FY12 and the stock is getting killed.  I think this is an overreaction, and will likely present a good buying opportunity when the dust settles.

The 10-year yield continues to languish and is trading at 1.86%.  This is about a 3-month low.  As for the VIX, it is up fractionally and nearly reached the 20 level this morning before pulling back a bit.  The 20 level has pretty much acted as resistance since mid-January of this year.

Trading comment: Back-to-back higher volume selloffs on Thursday and Friday lend themselves to the notion that the market is still in correction mode.  The SPX and Nasdaq both broke back below their 50-day support levels.  When the SPX broke back above its 50-day in late April, I commented that the rally was on light volume and most market leaders were still in corrections.  As such I felt that the market would remain choppy and it was not the time to rush back into buying mode.  I think that was the right call, as last week's market action looks like it means this correction has more work to do-- both in time and price. 

At SPX 1370, the market is roughly 3.6% lower from its April highs.  A 5% correction would take the S&P down to 1350, while an 8% correction would bring the 1300 level into focus.  I think investors should be patient and wait for the market to mend itself.  Watch your individual stocks.  Some of them will begin to act positive again and break out ahead of the market.  Others could lag.  We will try to protect recent profits, stay defensive, and hold higher cash balances in the interim.

KAM Advisors has long positions in CTSH


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