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January 25, 2014 – Weekend Market Comment

January 25, 2014 – Well you know what I say, speculators are like cockroaches, turn the lights on and they all scramble. So on Thursday we got another whiff of just how unstable banking is in China, which is not news but Master of the Universe George Soros has been spreading interviews predicting catastrophe in China a house of cards built of borrowed money.

Soros’s concern, expressed in a column for ProjectSyndicate, is that the Communist Party’s renewed focus on economic growth is at odds with its commitment to structural reform. He also likens China’s financial condition to those in the US before the financial crisis.

Then at the World Economic Forum in Davos, Switzerland -- Blackrock CEO Laurence Fink warned there is “way too much optimism” in financial markets as he predicted repeats of the market turmoil that roiled investors this week. “The experience of the marketplace this past week is going to be indicative of this entire year -- we’re going to be in a world of much greater volatility.”

Also of concern was the next FOMC meeting when no surprise there will be more tapering. In any case there was little appetite to be long into the weekend.

Most US stocks got slammed; the Dow fells 300-plus points in worst week since 2011
U.S. stocks fell sharply and Treasuries rallied on Friday, with the Dow Jones Industrial Average tumbling triple-digits for a second session and posting its worst week since November 2011, as investors pulled money from emerging markets and other assets viewed as risky.

The Nasdaq Composite  lost 90.70 points, or 2.2%, to 4,128.17 and registered a weekly loss of 1.7% after two weeks of gains. On Friday, the tech-heavy index reversed its early 2014 gains and is now down 1.2% since the start of the year.

The CBOE Volatility Index, known as the VIX, surged 32%, its steepest rise since the April 15 Boston Marathon bombings.

The real sell-off this week was in the Chinese markets and emerging market currencies. The FXI ETF plunged over 5%.

By the way there is an inverse ETF to FXI called FXP -- could be a great play if the loss of faith continues. 

On the other hand if you pull back and look at the last two years for the DOW the real question is why this did not happen sooner.

Well the answer is the markets are fundamentally strong -- the American economy is enjoying what I called last May, the New Momentum. Typically February is a lackluster month, and we are overbought, so a correction is not only likely it is important to keep markets healthy. So how far will this correction go? well who knows, nobody looks too spooked just yet. Arthur Hill has pointed out some interesting levels, I have drawn them here in three purple lines, the highest line is a 5% pull back, a bounce off the 200 day moving average is 7% and if the Dow gets down around prior support of 14720 it will be a 10% pull back. 

Nothing says the "Buy the Dippers" will not come roaring back Monday, but there was a few "tells" that foreshadowed the correction and they don't look promising. Utilities have been more active recently and the TLT treasury ETF has done well recently

Treasuries are up:

2014 is almost certainly not going to be the license to print money 2013 was, trees do not grow to the sky. Also there is the warning I gave you about "Presidential Cycle" theory that does not favor 2014.

If you followed my advice last week: " Lower your risk, raise your stops and hope for a continuation". The lowest risk position is cash and I am now 50% in cash. I also have 3ATR stops on my positions or some cases percentage trailing stop - for my long term positions. I was able to sleep through the sell off and my worst hit position "TripAdvisor", sold early in the correction. 

Now that you are flush with cash, wait for the correction, and buy all the bargains. For example the list I published last week. May be some bargains to buy after the pullback.  

But of course we don't catch "falling knives" wait for a confirmed bounce.