Headed for a 10% correction?

The market seems to be moving away from risk and into safer sectors, like healthcare and consumer staples.

By Jim J. Jubak Jan 28, 2010 6:22PM

Jim JubakAbout a week ago, I wrote a post saying that so far, what we were seeing in the market was just a correction.

I noted that the rally that began in March had been dotted with 5% corrections, but that we hadn't had a good, hard 10% correction while it ran. This time, I wrote, the odds were that this correction was going to be of the 10% variety.

I think that's even more certain today.

We started the week with two relatively weak up days -- 24 points up on the Dow Jones Industrial Average on Jan. 25 and 42 points to the good on Jan. 27 -- separated by a day, Jan. 26, with a tiny three point decline. The U.S. market looks like it's setting itself up for a continued decline.

What we're seeing Thursday is a rotation away from risk and into safer sectors. Money is moving out of technology stocks -- not surprising after disappointing results from Qualcomm (QCOM) and Motorola (MOT) -- basic materials and commodities (not surprising given the worry about China), and financials and into defensive sectors such as healthcare and consumer staples.

That's a typical rotation when investors are expecting a further decline in the stock market. Such a rotation tends to be a self-fulfilling prophecy: The sectors now being sold are precisely those that investors use as a barometer of market direction.

Technology stocks down, they say, for example, means that the market is going down and so we should sell technology shares. Which, of course, leads technology stocks to fall some more. Which motivates further selling.

I think a turnaround will need to begin with China and the emerging markets. A recovery there would shift investors' appetite for risk back toward the sectors that are falling now.

I certainly wish that I'd held on buying technology shares such as Intel (INTC) and Marvell Technology Group (MRVL) just before the correction (and boy, oh, boy, do I wish I'd sold Qualcomm before yesterday's stinko guidance), but I haven't seen anything to convince me that the fundamental story that says this is the beginning of a multi-year buying cycle for technology companies is wrong.

When I wrote about when to buy on Jan. 22, I said it was okay to nibble on anything down 5% but that the correction had longer to run.

I'd modify that to say that I'd be willing to nibble on anything down 8% or so, but I still believe this is just a correction and that it does indeed have longer to run.

At the time of this writing, Jim Jubak owned shares of Marvell Technology Group and Qualcomm in his personal portfolio. 

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