Market Correction Has Started

I hate market corrections. But, it is necessary. No meaningful uptrend has ever started without one.

I hear a lot of people blaming CNBC and the media for pumping the '87 crash as the main reason why we went down so much on Friday. But there were warning signs that this might happen along the way. Namely, the Dow and Nasdaq began to diverge with ominous but expected earnings report from the major banks including Citibank (C), Bank of America (BAC),and many investment banks continued to show erosion of earnings due to the credit crunch. The media tries hard to avoid using "subprime" these days. That word is like the plague so now, they use the word credit crunch.

No bull market can continue without the financials, transportation, and technology leading it. So the financials are in shambles with no recovery in the near horizon. The transportation segment is still alive and breathing but continued rise in energy costs will also put a damper in this segment. The only bright spot right now is the technology sector but even there, no amount of robust earnings from Yahoo, Google, and even EBAY has garnered much enthusiasm. In fact, Google retraced most of its gains on Friday on heavy volume into the close, a bearish sign.

We are in a precarious position. The dollar continues to go the way of the toilet paper, down the toilet. The sympathetic rise in oil to dollar decline is a huge concern. The continued erosion of the housing market and its related fall out from the subprime mess is now reverberating louder and louder.

The FED induced rally has now lost steam and it is forcing the investors to take a hard look at the reality of the situation. In truth, we are in a scary place. I fully expect the FED to cut at least 50 basis points when they meet on October 31 at the FOMC meeting. But will that be enough to help steer the economy in the right direction? The answer, sadly, is no.

With continued cut in interest rates, we run the risk of losing control of inflation and continued devaluation of the dollar. We are at a point of no return as the effect of FED induced stimulus will have positive and adverse effects. I for one at this point believe that the FED should continue to aggressively cut rates and worry about the inflation later once the economy has recovered (if it recovers). But at the same time, I grow ever skeptical that the FED is the answer. Perhaps there is no other way than to suffer stagflation to wash out the sins of our past ways.

Never the less, where we go from here nobody knows. It is scary. The media has run with the crash of '87 story. I don't know how Monday will unfold for the traders and investors. But one thing remains true. Thus far, earnings have been solid from the technology sector but that is it. The ominous warning from CAT probably doesn't help either. They put the odds of a recession at 50% but that's like saying the glass if half empty, it doesn't mean a thing.

I am out of Google and was fortunate to escape with a gain. I do have protective puts in place and plan to add more if Monday turns out ugly for a short term trade. But my cash position will allow me to aggressively buy for the reflexive dead cat bounce should the market pick up steam in its selling activity next week.

One thing to remember is that the market got way ahead of itself since breaking out in late August. We have gone parabolic since then and the correction that I anticipate will be sharp and swift. But the greener side of this story is that there will be fresh opportunities at the end.