Not So Fast

Yesterday's dramatic intra day reversal followed by this morning's early up then down stock market action has led some to conclude that the big correction has finally arrived. To that I say, "Not so fast".

As noted in several blog postings last week along with my podcast interview with Phil Roth, fully synchronized markets without meaningful divergences rarely produce declines more than that which was experienced from September 23 to October 2* (with its 3 to 5% drop).

Investment Strategy Implications

As noted in my Minyanville article last week, earnings expectations remain high for all size categories of stocks for the remainder of this year into next. This is where I suggest the investment strategy focus should be placed. A bifurcated earnings season in which second tier (and lower) US centric companies fail to beat expectations should portend seriously negative economic outcomes in the coming year. Reminder: 2010 will be a highly political year. 10%+ unemployment with virtually no wage growth can evolve into a protectionist broth with a very bitter economic taste.

From a stock market perspective, this concern MUST be reflected in the price action of the stocks BEFORE the real economy fact. The actual manifestation of this should come in the form of a price divergence between large and small cap issues. To date, no such non confirmation divergence has occurred. Until such an occurrence, the odds of something more than an air pocket decline in stocks (as described above) are remote.

This is the essence of combining fundamental with technical analysis. Or, to paraphrase Orson Welles, "I will sell no stock before it's time."

*click image to enlarge