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Risk Of A Major Stock Correction Is Growing

The U.S. stock market continued to go straight up and our model missed it. We tend to take higher risks than say a bond fund or a blue chip stock fund. Now saying this we view the reason for the rise in bonds and also stocks like Johnson & Johnson (JNJ) and Campbell Soup (CPB) as a sign of large institutional investors running for safety.

We are not saying that all the rising stocks were these safety stocks and we admit we missed some really great trades in stocks like Celgene (CELG). We just chose the wrong stocks with the limited amount of capital we have. End of that story. We are still alive and we try again.

What we mean by saying "institutions running for safety" is that we think they are buying defensive stocks to protect against a market sell off and or currency deflation. We believe they will have to soon sell even these stocks due to commodity deflation that will spill over to consumer staple deflation.

In our opinion, the Fed policies have kept too many companies that should have failed in business and now many will starve from lack of enough consumers in the same way an overpopulation of animals starve from lack of food.

We had a stock NQ Mobile (NQ) that we bought reverse down hard on us. We took larger than normal risk and we paid dearly. Luckily we also had bought Glu Mobile (GLUU) and it offset some of the NQ loss. We sold NQ on a bounce.

On the other side we are seeing more cyclical and industrial stocks like US Steel (X), ArcelorMittal (MT), Walter Energy (WLT), Souther Copper (SCCO) and iShares Silver Trust (SLV) all on very harsh downtrends and I would venture to say on a crash course. FedEx (FDX) and Oracle (ORCL) also took hits to the downside recently.

So now the question is what to do? Well we are now a bit more bearish and yet the trend is straight up. So we now attempt to fade some highs with quick stops until the downturn actually occurs.

In our opinion, the U.S. stock market is extended beyond any normal parameters and without any corrections we feel there may be a looming and growing danger of one big correction that makes up for the market going straight up for months. This can even happen one morning as a gap down day open and we would very much not like to be long on this potential of a day.

We are preparing for a change of trend or more likely a correction and then we will see if charts just break down to generate a bear market or form new bases which allow us to find who we believe to be the new leaders for the extension of the present bull trend.

For now we will use inverse funds to try to capture gains from a sell off or correction and we will stay aware so we can seek stocks breaking out of bases either up or down. The trend is still up, however we are seeing a spread of breakdowns begin to occur.

This eventually may cause the trend to change down for the general market. Eventually is a very non specific word and that is exactly why we chose to use it because we have seen markets both extend and breakdown beyond any overbought or oversold parameters that any quant genius has come up with.

The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Jesse Barkasy

Jesse Barkasy

I have traded my own accounts for 24 years and have worked as a professional trader for 13 years.

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