Friday, January 22, 2010

What Will Monday Bring?

After three days of misery, caused by a combination of potential Chinese fiscal restraint and Obama political expediency regarding bank and Fed bashing, investors are recooperating and wondering what Monday will bring. I believe we will see more selling as everyone knew stock prices were too high, but were playing a game of musical chairs as they wanted to continue to make money while momentum was pushing equities upward. Everyone thought they could exit before the downdraft.

Just as Massachusetts changed the political landscape, the past three days have reinforced what investors knew, but didn't want to accept. Stock valuations had been too high and everything was not improving. We aren't in for a quick bounce back. Gains should be protected and speculations reduced. Selling will continue, causing a significant sell off until prices reflect a more reasonable multiple of earnings growth.

As I laid out a few days ago, my positions have been lightened with only about 25 percent in stocks. The remaining 25 percent still hurts. I feel lousy. Recently opened short positions in DFS and COF have paid handsomely. A large long position in K-12 has been reduced to only 5000 shares as I wanted to capture the gain and I felt the company would tread water till next September when school districts and parents decide on internet education decisions. Luckily LRN hasn't gone down in the downdraft and I've been able to sell at good gains. My remaining positions are largely concentrated in emerging markets and international companies. I haven't decided what to do with those.

While the past three days have been painful, the percentage decrease has been minimal. I'll look for more vulnerable companies over the weekend and sell them on Monday. Some up days will present themselves, but the tide has changed and investors are starting to treasure capital which means selling. My suggestion is to lessen long positions and add negative positions. As Charles Barkley says " I could be wrong, but I doubt it."

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