Friday, April 13, 2012

Correction Underway

Its become pretty obvious a market correction is underway now.  The S&P 500 has pulled back from 1420 to 1370 in about a week and a half. The Canadian based TSX continues to consolidate and bounce around 12000. As someone who mostly invests, and sometimes trades, how do we play this from each aspect?

As a long term investor, I prefer to look at things from 3 different perspectives: fundamentals, macro, and technical.

- The fundamentals tell me the market is fair to slightly undervalued, and because valuation is a main determinant of long term returns, this correction should be bought.

- The macro environment tells me things are getting better in the US, China is not headed for a hard landing just yet, and Europe is still troubling. However, China has at least stopped tightening and looks poised to cut bank reserve ratio requirements. All these signs point to a neutral to positive medium term outlook for the north american equity markets.

- The technicals are saying this will be a mild correction, possibly taking us down to the 1340-1360 range, where there is considerable buyer support. So far the first dip into that range has found that support and we've rebounded to close the week at 1370. I'm looking for another dip in the next couple weeks into the 1350s as a buying opportunity. I believe the technicals are saying we're in the B section of an Elliot Wave, that will last 2-4 weeks.

The trader part of me is looking to go long beta sometime in the next 2 weeks. I believe we're in the middle of this economic cycle so I would select favorably valued companies from industrials or technology, such as Cummins, Emerson or Intel. I also think financials could continue to push higher, and would go long JPMorgan, Wells Fargo, and Citigroup on pullbacks.

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