What Happened Today?

So the question on everyone's mind is what caused this 'massive' selloff, which in effect was barely a blip on the big picture... but a lot of individual issues took it on the chin, especially those in favor the past 7 weeks. Really the 'reason' doesn't matter - the fact we have some basic weakness and reversals is the important thing; 'why' it happened could be attributed to the temperature in Miami today or how many fish are in the aquarium in your doctor's office. It really doesn't matter. Just like the bad news in retail, financials, and housing has not mattered since mid August. What matters it the market has chosen to ignore all the bad news. The important question is, does this mark the beginning of a recognition of bigger issues OR is this a few hour correction. I don't know the answer; no one does.

What I do know is, as I wrote yesterday morning it is time to be more cautious.

But doesn't valuation come into play at some point? Or can the same 40 stocks lead us each day for 3 more months. Everyone says "we are cool until end of year". When everyone says that it makes me wary. Bears seem to have thrown in the towel; if not intellectually, at least 'stock' wise. Basically right now it is too easy being a bull.

This market has detached from the fundamentals of the economy lately and simply fed on its own internal momentum. To not be left behind, you need to participate, however reluctantly. I am sure a lot of people are like me in realizing that a lot of this move doesn't make sense but you have to be a part of it from a money making perspective. So you have to separate the 'logic' from what is going on in the 'market'. And know when it turns, it can turn hard.

But going into an earnings season where I see (most) domestic based companies warning of slowdowns (versus international companies having the times of their lives) - I wonder if perceptions will at all change. Will lowered guidance by domestic companies matter?

Further, the market loves to somehow leave the most people in a lurch - bears have been talking all September how the fundamentals were degrading and how historically September is the worst month - but to be bearish on stocks meant you left a lot on the table... and when that happens week after week after week, eventually people throw up their hands and chase, and start buying in at any price. This seems to be what is happening the past 3 weeks or so. My gut tells me last Monday and Friday were the 2 final body blows for the bears; when we saw 2% broad based rallies across all indexes along with sectors rallying last week (retail, housing, restaurants) where it makes no sense for there to be strength other than an absence of sellers. So I think once bears saw even THOSE sectors were going up, they threw in the towel. Which combined with the hubris of bulls at "how easy it is, buy any Chinese stock and make 30% overnight" is exactly when it would make sense for the market to reverse.

Yesterday we had a cautious number in Monsanto (MON) - it was ignored. In fact the stock went HIGHER today. This morning we had a slew of bad news in retail - it was ignored. What, Walmart sales are up 1% - woo hoo take that stock up 3%! Two weeks ago we had kitchen sink quarters in financials - it was ignored (again I ask what will we say in 3 months if we see another slew of terrible earnings from financials? that it was a bathroom sink quarter?). Each time bad news comes out and gets ignored it emboldens bulls, and frustrates bears. And the beat goes on. Did today change things? Impossible to tell - but as I wrote earlier, right now if you are a fundamental investor its impossible to find value in growth stocks - they have all been run up.

I hypothesized that since stocks in my portfolio had run up so much, at any turn they would be the hardest hit and I saw a preview of that today, the fund went from +2% around 1 PM to -1% by end of day, a 3% swing. Whew. Even with 10% cash and >10% short ETFs. Thats a function of having great companies with great stock performance that had run so far from their technical support levels that they have a long way to fall before finding real support. To me real support is the 50 day moving average.

So the way I am going to approach this from a 40,000 foot point of view is remain in the cautious camp; watch the market leaders for more weakness (or not), but if the market turns on a dime and just continues up, remain cautious unless I can get better prices on stocks I want to be in. I've reviewed the stocks in the portfolio and of interest and I find very little in the way of bargains outside of the deep sea drillers which I bought earlier today. Everything else has had "its run" - now in situations where a stock drops 11% in a few hours like Riverbed Technology did I will buy, but perhaps not in the same scale I did before. Each tick up in the market the past 7 weeks has created more risk from the long side. While it's "scary" to buy in mid August it is in fact less "risky", and while there is no "fear" at buying in mid October, it is in fact a lot more "risky" since the prices are so much higher.

The hardest thing now is (if this is the beginning of any downtrend) is not to get sucked in and buy too early on a pullback. Very difficult to avoid. But what I am going to do, is repeat the exercise I did back in early September and create a new shopping list of stocks I want to buy - and see how far each stock is from its major support levels, both the 20 day and 50 day moving averages. So when some of my favorites inevitably fall back to their 20 day moving average, I will layer in a position. If the stock bounces from there, well at least I have some ownership. But if the stock continues downward to its 50 day moving average which should provide more support - I will buy more. This is essentially the reverse of what I have been doing on the upside, selling positions off in pieces as they climb the price ladder.

So from here I watch how bad news is treated - if you finally see stocks go DOWN on bad news, you know the psychology had taken a turn and we could be in some rough waters. If it continues to be ignored, than this was just an unfortunate afternoon ... however that doesn't change the reality that the stocks *I* like are not at great buying levels, so I plan to let them come back to me before applying more cash on the long side.

After my buys today in the deep sea oil stocks, along with buying some stocks that reversed double digits, and some more short ETFs I am down to a 3.5% cash position. My short ETFs are up to 13.5%, up from 11.0% last Friday. These short ETFs have been a major losing proposition the past 7 weeks but hopefully they create some buffer if indeed we do have some 3-4-5% type of correction going forward.