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.

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