What a correction looks like

Just as I suspected, this dip in the market has bulls running for the hills and the bears orgasmic which to me confirms that it's just a correction. No bear market begins this way. This behavior has been evident every time the market has dipped during the past 10 months. Throughout the past several months I've been saying that this bull run has been the most hated one I ever seen. Most of those who panicked during the crash missed out on the rebound or even worse, shorted it, those who did short have been slaughtered like swine but haven't capitulated unless by force and plenty of those who are bullish are weak and quick to run for the hills at the first sign of trouble. That's wall of worry action for you.


Take a look at Jim Cramer's site realmoney.com. Here are some of the headlines "this dip cannot be bought" "major break in uptrend". The financial post this weekend has a picture a bull behind bars with the title "TAMED" in big bold letters. "the thrill is gone" is the title of an article underneath it. Meanwhile the bears that dominate the yahoo message board are in frenzy....the same amateur losers have been getting mauled so badly for months showing zero humility.

Based upon the headlines and excitement from the bears you would figure that the market took a 20% dive. Yet all we have seen is a 5% drop on flimsy excuses after a 70% run . Meanwhile this drop has resulted in a super spike in the VIX to overbought levels which were what we saw at all prior correction lows.



If you look at the pricing of VIX options you will see that the puts carry a substantial premium to calls meaning VIX traders expect the VIX to fall in the coming weeks. I noticed the same thing happened in early November. These VIX traders tend to be "smart money"

Complacency has turned to fear very quickly. Since December I have been describing the market as having a running on fumes feel to it....well, it now has a full tank of gas.

Now, typically after a substantial decline like this you get a reflexive bounce followed by a retest or lower low. I suspect something like this will happen. Admittingly, traders were aggressively buying calls for several weeks prior to this drop (and they got spanked according), therefore, we may have to see some of the opposite behavior for a week or 2 at least before any sustained rebound occurs which argues for some base building. Put buying is already on the rise given the high put/call ratio of 1.07 on Friday which has typically signaled a ST bottom.

The multi-month consolidation phase I was calling for may have very well begun but don't rule out a move to 1150-1200 because we now have the gas in the tank to get there. I'm not going to try and guess how every wiggle is going to play out. What I'm quite sure of however, is that this is a correction and not the start of something nasty a la 2008 even if we go a bit lower from there. If the evidence changes so will I.

The easy money in the indicies has been made. After a 70% run in 10 months, you can't expect that sort of pace to continue forever. Those who are warning about bad things to come just because the 10 month uptrend since March is broken are quite frankly idiots. How can anyone expect that type of uptrend to be sustainable? As I pointed out a few times already, every bull market of the modern era has had a consolidation phase after the first 10-12 months of its onset.

The market needs a well deserved rest and a sideways choppy market is what likely lies in store for the next several months. This suggests that it will be a stock pickers market and that's the strategy I continue to use. If I get the "all in" buy signal like I saw in early November I'll post it. We're almost there already....