MarketWrap 1/20/10---FusionIQ thoughts on "Is this the top?"

U.S. stocks ended off earlier lows but still lost more than 1 percent Wednesday as China, earnings and the dollar's gains clipped the market's momentum after Tuesday's rally.  The Dow Jones Industrial Average shed 122.28, or 1.1 percent to close at 10,603.15, erasing all of the prior session's gains. It was the worst one-day percentage drop so far this year. The S&P 500 fell 1.1 percent and the Nasdaq dropped 1.3 percent.  Most Dow components finished lower, with IBM, Kraft and Alcoa at the bottom of the pack. Bank of America, Merck and Disney were among the few gainers.  Spooking investors was a report that the China Banking Regulatory Commission had asked several banks to stop issuing loans.  While the CBRC's chairman denied that he had asked banks to stop lending, Bank of China, one of the country's big banks, said it was taking steps to rein in loans.  The dollar hit a one-month high against the euro amid worries about Greece's financial situation, and rose against other currencies as the election of a Republican for a U.S. Senate seat in Massachusetts raised expectations for spending cuts in Washington.

As we commented earlier today to customers…..The legions of worry warts still abound as every minor sell down continues to be met with the response, "Is this the top ?"   The answer is probably not, especially while pervasive concern continues to be the dominant investor theme.  Now that said can we have a correction of five10 percent?  Of course.  However,  we continue to find it hard to believe that top is in play when everyone continues to call for it!  After all tops are formed when everyone becomes so comfortable with stocks they invest all their available liquidity without a hesitation or care in the world.  And clearly that is not the current sentiment.  Again, it is very likely we will have some semblance of a decent size pullback soon seeing the S&P 500 has run up 10% from just November 2009, 31 % since July 2009 and 64 % from the March 2009 lows.   So do we think a major top is in?  The answer again remains no.  In regards to protecting capital from a drawdown or a correction or what is the risk to putting new money to work today and the answer changes.  The answer in this scenario is the run up in equities puts investors at risk to a correction, not a top, but a correction.  Our guess is that the correction would be similar in size and scope to the June/July 2009 correction that saw the S&P fall 9.00%.  This correction would likely create more pessimism and fear and then create one last leg up that would create the overconfidence associated with a top or a very long and protracted trading range.  At this point the best thing to do it to place trailing stops on current positions and or buy an inverse ETF to hedge out some temporary drawdown possibilities.   From a trend perspective the trend remains up and must be respected.   If the S&P 500 violates its up trend near 1050 we would suggest getting more active with a hedging strategy or tightening up stop loss levels.  However, this remains a market fraught with caution not speculation thus we continue to believe corrections should be relatively shallow.