As I mull it over, I am becoming more convinced that the market faces a meaningful correction. Between commodities rolling over, a weak earnings season, the other concerning economic data points that I have highlighted before, coupled with a chart (discussed yesterday) that looks like it's ready to turn, I think that I will put on some positions to be prepared.
However, as noted already, even at the major turning points in 2000 and 2007, the process of having the market top out and then break down did not happen all at once, but instead over about a 7 month period each time. We're only in month 2 then, if I'm correct about the ultimate outcome. Of course, there's no rule that says it has take 7 months, but I think there will be intervening events that force it to drag out a bit.
For starters, yes, the market looks weak, so I think at the first sign of a contraction related to a deflationary threat, the Fed will step in and up the ante on the size of their asset purchases, and perhaps even the scope of what they buy (think Japan, where the BOJ is buying debt, equities, REITs, etc.). So, the initial response to further Fed action is likely to be some sort of relief rally. And watching how long it lasts, and how powerful it is, will tell us how vulnerable the market is.
Having said all of that, I may still dip a toe soon and initiate very small starter positions on the short side with XLY and XLI, two ETFs that hit the economically sensitive sectors of consumer discretionary and industrials.
