an tSionna 1.25.10

Well now we know that our concerns flagged through the past couple of weeks about the markets were warranted. We took on a much more defensive posture in our thinking last week-making some sales in risk appropriate accounts depending on their known investment criteria and depending on various other factors such as current cash positions and what they owned. We could become more defensive depending on what we see early next week and the nature of the inevitable rally that should occur after this kind of sell off.

Stocks first showed cracks by behaving poorly off of both IBM & Intel's earnings this month. What I think most surprised the market was the attacks on the banking sector by the Obama Administration on Thursday. Credit tightening in China and speculation on the Re-appointment of Federal Reserve Chairman Bernanke added to the negative mix. Given this sort of news mix we should not wonder that liquidity dried up and the buyers disappeared. People are so often amazed at how quickly stocks can decline often giving back days and weeks of movement in very short periods of time. That is unfortunately the nature of modern markets where traders can move thousands of shares with the single flick of a computer mouse and low commissions make it easy to re-enter positions at any given moment.

Stocks have experienced weeks if not months without a serious correction of 10% or more. That's why a drop of close to 5% in three trading days is concerning. A drop that happens this quickly should be followed by a counter trend rally of some sort. We will get our first clues about the nature of trading going forward by what follows. A market that stabilizes and recovers and ultimately takes out the early January highs would likely be considered a bullish development. It would also be in keeping with how stocks have traded since last March.

However a market that fails at those early January highs and or makes a series of lower highs and lower lows could mean that the character of trading is changing and would force us to become much more defensive in our investment posture. As usual we will let our analysis of the money flows be our guide.

There are a lot of longer term positives. I still think the economy is rebounding and think stocks have an attractive valuation longer term based on what we know right now. Company earnings and forecasts so far have trended positive and may ultimately save stocks. But I do think we need to be aware that the market is giving us a heads up that things could be changing.  Stocks are likely to behave differently going forward into 2010 and the trading environment looks like it will be more challenging than what we have seen since last spring.

*Long ETFs related to the S&P 500 in client accounts.