Back on the edge of the Abyss

There's lots to cover today, so I'll just get to it. I'll probably have to do a few blog entries today, to cover it all. But I'll get it all done tonight, so let's get started.

What looked like a nice reversal yesterday for the S&P 500, turned sour on a dime. I've decided not to mess around with this market anymore, so I'm not going to try to game the market with ultra shorts. Right now, each day is like a coin toss. But if/when I think the market hits the true "panic and puking" point, I'll move into some ultra long ETFs. But for now, the VIX isn't showing signs of a bottom. Perhaps we get that crescendo sell off; perhaps not.



I also wanted to talk a bit about how this correction is unfolding. It's a bit different than the recent ones. I much prefer that "waterfall" sell-off, where every sector gets hit at the same time. HARD. That's the January or March type sell-off. There's another type, which is much harder to trade around, and that's when the market bottoms in 1/3rds. One at a time, sectors bottom, and start to show relative strength compared to the next 1/3rd, which starts to sell off hard. With the economy the way it is today, it works out much like this.

1/3 Financials, retailers, home builders, some tech; early cycle stocks
1/3 Tech, assorted industrials, transports and a lot of other areas; mid cycle stocks
1/3 Commodities

In the past 6 weeks, clearly, the first 1/3rd has taken a beating. Then the second 1/3rd joined in on the fun. At this point, there were only few sectors still working. Ags, Coal, Natgas (last man standing - though, I think it took a shot in the ribs at the end of the day), steel, oil. That's a very slim and narrow range of working stocks. And sooner or later as people flee into these areas: the final 1/3rd - they get crushed. That's where we are now.

The playbook tells me to back off the bearishness of the first 1/3rd. I've done that by cutting my exposure to SRS. This is the area to bottom first, and probably bounce the hardest. (before rolling over again at a later date) The second 1/3 seems to be in a bottoming process. Perhaps we get more downside. Perhaps not. But I will use the VIX to gauge that, with the S&P 500. And of course, we need to be extremely cautious with the last 1/3rd. This is going to be short and fierce.