Supply Hitting The Market

During the latest week we have seen a number of IPOs and secondary offerings. A large new supply of stock in the market is a negative. There is reason to believe that we will be seeing more supply in the months ahead. The following quote is from a banker quoted in yesterday's Wall Street Journal speaking about new offerings:

"As far as pipelines go, everyone is busier than they have ever been. ... I personally have been on 30 pitches over the last 10 days, which is very busy."

This is another headwind for a market that is starting to look shaky. Have a great weekend.

The Correction Has Begun

The correction that I had been looking for has finally begun. If this follows the path of previous corrections we should expect it to last through next week. However, seasonality turns very positive after Thanksgiving so we could see a low going into the holiday.

While seasonality will turn positive after Thanksigiving, I am not expecting a year end rally. Despite the positive seasonality I expect a decline into year end, but not a collapse. The divergences during the latest rally and the complacent sentiment ("fundamentals don't matter") make me believe that the market is tired and in need of an intermediate term correction. However, it is tough to see a total collapse with seasonality so strong.

Many readers have asked or are likely wondering why I lowered my net short exposure into yesterday's plunge if I am negative on the market. There are two reasons. The first is that I want to respect the seasonality, even though I don't believe it will hold this year. The second is that I am short the SPY, but long cheap, "defensive" stocks. These stocks have been outperforming the market for a while now and I expect them to continue to do so. I expect to make money in a down market, even if I am not net short.

One From The Road

I am traveling today but wanted to give a quick update. I have sold December covered puts on my short SPY position ( the 100 strike). In addittion I have sold the EXC January 45 Puts naked. This brings me closer to neutral.

Expecting A Move Lower

The conditions are continuing to line up for a move lower:

• Market is overbought.
• Rydex traders finally became aggressively long yesterday. They held out this entire rally, until now.
• We had a second day in a row where breadth lagged the market.
• Sentiment surveys (Investors Intelligence bears at 21%) and anecdotal sentiment are showing complacency.

My best guess is that we see a down day today. However, it is possible that option expiration will delay the move lower until next week.

Same As Yesterday

Today's trading looked a lot like yesterday's. A flattish day with negative market breadth. The best chance for a break either way in the market is likely tomorrow. Otherwise we might need to wait until after expiration to find out which way the market is going. I am traveling again tonight and will return on Tuesday. I will try to post at least once a day. Have a good night.

Phase Two

My thesis in entering my pharmaceutical trade was that pharmaceutical stocks would make a move in two phases. The first phase would come with the closing of the Pfizer/Wyeth and Merck/Schering Plough mergers. I believed that would lead to an initial move higher. More than 6% of pharma's market cap disappeared when those mergers closed and indeed it did lead to a move higher in the group.

Pharmaceuticals have underperformed for a decade and managers are underweight the group. The second phase would come from these managers starting to chase pharma as it outperforms. While I was very confident that phase one would materialize, phase two was more of a leap of faith. It appears that phase two is now materializing.

CNBC Nonsense

I don't watch CNBC but have heard that numerous pundits have come on the past few days and said that the fundamentals don't matter and that they are bullish. While its true that the fundamentals haven't mattered, the fact that people are so complacent is a red flag in my opinion.