Top 10 Myths of Tuesday's Correction

10. This had nothing to do with anything fundamental!

A long string of punk economic data was finally broken by a marginal ISM report Thursday. But that was cold comfort to those who track the economy and have noted the ongoing deceleration in growth.

Probably the most overlooked story from Tuesday was the live interview with Freddie Mac's chief on CNBC early Tuesday morning. Freddie Mac essentially announced that they would "stop purchasing subprime loans or any securities with high risks of default."

In 2006, about 15% of new mortgage originations (not refis) were sub prime. Add in the various "liar loans" where there is no income check and no documentation is required, and other flavors of exotic fare such as interest-only loans, and piggyback mortgages that allow 100% loan to value, and you have as many as 30% of new mortgages.

With one fell swoop, Freddie just eliminated between 15% and 25% of home purchasers from the credit pool, and that just set the housing bottom-callers back another year.

Drawing Fact From Fiction

Since the summer, the rampaging bulls have had their way with just about every market on earth. Volatility had been subdued and risks ignored.

That era is likely over now. Indeed, the general commentary ("buy the dip, hold for the long term") may be ignoring a developing shift in psychology. It reeks of complacency.

In a note to clients after the plunge, we said to expect three things:
1) Increased volatility;
2) attempt(s) to return to prior market highs;
3) deeply oversold conditions that will eventually create great entry points.

Traders are likely better off waiting for these conditions prior to jumping into long-side trades.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting