NEW YORK (MarketWatch) -- It's rough out there, as anyone within shouting distance will tell you. And make no mistake, there's a lot of yelling going on. Main Street is screaming at Wall Street, politicians are barking at each other and there's a heightened state of tension spreading throughout the world.While it's easy to get caught up in the doom and gloom, we must remember that the sword swings both ways. An ability to view obstacles as opportunities is the hallmark of human spirit and silver linings exist in this economic twist. The credit crunch is more pervasive than the dot.com and real estate crazes, but we've been there and done that on both sides of the bubbles....We've been cautious on the big picture for quite some time. While it's not a good idea to be a contrarian for the sake of swimming against the tide, there is a certain utility in variant opinion. With a conscious nod that hope isn't a viable investment vehicle, we wanted to highlight a few reasons for optimism as negativity swirls through the street.
.... Market corrections are a function of time and price. We've long offered that cumulative imbalances were percolating under the seemingly calm surface and now they're out there. The first step towards solving a problem is admitting that you have one. That process is now in motion.
The upside of anger is that the market has already begun to price in a recession.Citigroup,Merrill Lynch,Intel and other market leaders are off upwards of 50% from last summer's levels....
With the implosion of the housing bubble, property values have come crashing back to earth. That's a bitter pill for holders of real estate but it presents an opportunity for folks who have patiently waited on the sidelines.
Just as it felt like we would never recover from that post-bubble technology spill, a similar mindset has emerged in this asset class. There is more carnage to come and this isn't a call for a bottom, per se. It's simply an acknowledgement bargains exist for those with the proper means.
Nobody likes to prosper from someone else's pain but the sad truth is that the other side of the real estate bubble is upon us. There are 1.5 million properties currently in the foreclosure process and that means that someone is going to pick up a home on the cheap.
It might as well be you.
At some point during the past ten years, the collective consciousness began viewing profits as a right rather than a privilege. That manifested in many ways, including the home equity binge and credit dependence. Consume now, pay later and finance at zero percent. It seemed too good to be true and with hindsight, it was.
So, what have we learned? There is an eye-popping abundance of debt in the system, the world is woven together with $500 trillion of derivatives and if risk has indeed segued from stagflation to deflation, commodities are vulnerable and the dollar should rally.
While it's been a painful path from the October highs to the current sighs, we've gleaned valuable insight. We've been watching the "lower highs and lower lows" for months and they've painted a powerful picture. Until that pattern is broken -- and we've got room to run on the upside before it is -- selling rallies (rather than buying dips) should serve us in good stead.
One of the more disturbing elements of Tuesday's lift off the lows was that the best performers were "pay me now" plays. As important as the financials are to the DNA of the marketplace, the sharpest rallies occur in the context of a bear market. The same can be said for the small caps, homebuilders and retailers, all of which ripped higher out of the gate.
Trading moves traditionally migrate through three phases: denial, migration and panic. While the mainstream psyche continues to adjust to the notion of recession, the stock market, as a leading indicator, has already begun discounting those prospects.
In a perfect world, we would prefer volatility measures to spike to previous pain fulcrums. While that didn't happen -- the VXO top-ticked at 39 yesterday, well below previous readings of 57 -- there are indications that the crowd may be getting a tad too negative.
The American Association of Individual Investors is at the second lowest level since it's inception in 1986. Odd-lot option traders have turned excessively bearish. The 10-day average of the CBOE equity put/call ratio recently ticked at the second highest reading in history, behind only the days immediately following the terror attacks of 2001.
While the potential for redemptions and forced selling remains, the path of maximum frustration may be pointed higher for the first time in a few months.
It could be worse!
The world is tough and the market is frustrating. That much we know and with each step we learn. With time comes experience, however, and quite hopefully, balance.
It should never take something bad to make us realize we've got it good. As the greatest wisdom is bred as a function of pain, perspective is important.....
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