First Real Stock Market Correction
of 2011—an Opportunity?

Michael tells you why he thinks the recent correction in the market has little to do with Standard & Poor’s downgrading of the U.S. credit rating...and why the correction could be an opportunity. I know this might sound a bit off the wall, but it’s my opinion…

The recent correction in the market has little to do with Standard & Poor’s downgrading of the U.S. credit rating. After all, if we look at it, after the downgrade, U.S. Treasury bills rallied—more investors flocked to them instead of away from them!

It’s only logical that, if a country’s debt is downgraded by a rating agency, the country’s bonds will fall in value—but the opposite is happening in the U.S. This tells me that the market pull-back had little to do with the downgrading of the U.S. credit rating.

Stocks are down 4.6% for 2011. What we’ve experienced over the past few days is the first real stock market correction of the year. As I wrote on Monday, in the summer of 2010, stocks corrected to 8.5% below where they started 2010—and the market still managed to finish 2010 up about 10% for the year.

Make no mistake about it. There was big money made on Wall Street over the past few days, as the short sellers got what they were hoping for. It’s a global economy. Also, professional and institutional traders make up most of the trading activity these days—hence the market moves quickly. Computer-based trading kicks in quickly as the market moves up or down, intensifying the trend.

Let’s call a spade a spade…

Wall Street wants more from the Federal Reserve. Sure, Wall Street took in QE1 and QE2. But it wants QE3 or some other form of it. And I have a suspicion that the Fed will deliver what Wall Street wants, as it usually does.

The market sell-off has been overblown. I will even go so far as to say we will have a rally from the market’s severely oversold condition. Maybe a good time for some good, old-fashioned stock picking.

Michael’s Personal Notes:

Just when you thought you’ve heard everything…

The Bank of New York Mellon told large clients last week that it would charge them to hold their cash. The extraordinary measure of charging companies to hold their cash comes at a time that corporate America is socking away cash instead of investing it to grow their businesses.

We already know that, if you buy a 30-day Treasury Bill, you get a yield of 0.4% per annum. Hence, most corporations prefer to deposit cash in large, stable banks like Mellon.

Who would have thought a company would have to pay for a bank to hold its cash? What does this tell us? There’s too much money in the system. Banks are not lending it out because they are scared to. Corporations are not big borrowers these days either.

The way I look at it, if you are a strong, safe bank amid a glut of weaker banks, why not have your customer pay you to keep their money safe? It’s a great gig if you can get it.

Where the Market Stands; Where it’s Headed:

For the bear market rally in stocks that started in March of 2009 to be over, we would have to see the Dow Jones Industrial Average fall decisively below 9,658, the mid-point below its March 2009 low and May 2011 high.

In other words, for this bear market to move from Phase II to Phase III, the Dow Jones would have to break below 9,658.

Phase II of a bear market is when investors are lured back into stocks after the initial Phase I take down. Phase III is when stocks move back down to their Phase I price lows.

Yes, I know many investors and analysts are throwing in the towel on the stock market right now. I’m not ready for that quite yet.

What He Said:

“For the economy the message from retail stocks is quite clear: consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008