I avoid making speculative decisions based on what I hope might happen. Instead, my decisions are responsive to the current behavior of both the market and the stocks in my portfolio. At this time, the market is demonstrating various weaknesses that suggest an oncoming correction. Although technically we are still in an uptrend, it’s hard not to notice the following red flags:

 

1. We are in January, a historically tricky month.

2. The last two days have shown aggressive selling across almost all industry groups – not

 typical of normal rotation.

3. The market leadership is showing a higher concentration of defensive and conservative

 industry groups, such as commodities, energy and capital equipment.

4. The market is up over 25% since the beginning of the uptrend that began 9/1/2010

 without experiencing a significant correction.

5. This is an aging bull market that began in March 2009, making it nearly 2 years old.

 

Knowing the severity of the correction would certainly help you position your portfolio appropriately. The problem is, we have no idea how far down the market will go, or for how long. Therefore, I am beginning to enter a defensive mode and am raising cash to cut back my exposure. If I am wrong and the market continues its uptrend (which I hope it does), I can always adjust and buy stock back. I’ve always been more successful putting defense first, which enables me to be out of the market when things are at their worst.

 

Best Returns,

 

Scott O’Neil

President of MarketSmith