Corrections don’t send out invitations or phone ahead

The current correction began in April, a beneath-the-surface, sector-by-sector rattle that’s now caught the attention of everyone.

Nobody sent out an evite so you can stop searching your inbox. You probably didn’t get a voicemail about this ahead of time either. Sentiment shifts quickly, irregardless of fundamental rhyme or reason, and no one tells you about it in advance.

At first Utilities and REITS and other so-called low beta sectors began to trail the market, flattening out during broad market rallies and ceding leadership to techs and banks. Then they began an outright decline, joined by junk bond ETFs and MLPs.

This went on for a few weeks and then began to be noticed broadly. We had had these divergences before between some sectors and the overall market – but each of these divergences had eventually resolved to the upside all winter and spring long. It was a maddening pattern for the bears – weakness would be detected in trannies or small-caps or whatever and it looked as though the rally was in danger. Then the herd would come thundering into the laggard sector and suck up every stock in sight, thus rendering these temporary divergences meaningless.

Not anymore.

There is substantial technical damage across many of the sectors and asset classes that had led the rally since Thanksgiving. The S&P 500 has just printed it’s first back-to-back weekly loss since the rally began and the beatings have begun to leave a mark.

Have you seen the Mortgage REITs lately? Absolute shitshow – and these things were pitched as risk-off bond equivalents by brokers all year.

How about the pipeline stocks? They look like Amanda Bynes feels.

What changed? Why have the divergences stopped resolving to the upside?

The underlying cause is exhaustion, the proximate cause is the wake-up call Bernanke delivered to the market via Hilsenrath. US investors are also looking to Japan as a cautionary tale, what happens when exuberance takes hold too quickly and markets get cartoonish. As the Wu said, “You rolling like Trump, you get your meat lumped.”

This is all good. Better to be jolted back to sanity now than to go another six months plowing into alternative income vehicles at historically out-of-whack valuations. I was teasing them and calling the defensive stocks  dotcom names a month ago, we all laughed like bastards but you probably didn’t heed me. (see: When Defensive Stocks Plays Offense)

We took things a bit too far in certain sectors. What began as “The Search for Yield” became “The Hunt for Yield” which implied an aggression and a desperation that would soon turn into the “Chase for Yield.”  By the time it became “The Reacharound for Yield” it was obvious to seasoned players that it was time to do something else – utterly-ignored cyclical stocks were the obvious call.


So fine, the volatility is back. A little bit of fear is a good thing and getting the correction rolling now removes one of the key linchpins of the bear argument.

If this sector-specific pullback wants to “go wide” and knock the broad market down a peg (we’re already off 3% from the YTD peak), so be it. We’ve got a nice cushion and a long summer ahead.

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