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If it ain't broke...


The market continues to track very closely to last year's action. As is normally the case, the market begins a consolidation or correction process on good news. The good news of course was improved expectations from Intel (INTC). Funny, but it was the exact same company that caused the peak in the first week of December last year. Last December, there was talk of better prospects for INTC's microprocessor business. That peak was followed by a correction that centered around the "high beta" stocks, as money rotated into the more defensive Consumer Staples like Proctor & Gamble (PG). Yesterday's action suggested that the same is taking place this year. Again, it is important to remember why this rally took place.

Much like last year, the rally that began October 9th has very little to do with the fundamentals. This has been a structural move based on the following:

· Lack of sellers. By the time the market hit its low point in October, there were very few sellers left because the weakness had become so pronounced and those negative factors that led to the weakness had been in place for so long that anyone who was long had ample time to sell. Most rallies begin with a lack of sellers rather than aggressive buyers, but it is more pronounced in countertrend rallies, because the level of shorting is so much higher than normal.

· Asset Allocators. Bonds had so much strength and stocks were so weak that simple pricing caused funds to have far too much exposure to bonds and too little exposure to stocks. As a result, from a purely formula based strategy, they sell bonds and buy stocks. That again creates some level of buying in an environment where there is very few sellers around.

· Portfolio performance chasers. The one thing that rarely changes is human nature. Fund managers get paid to outperform the market and going into the third quarter very few actually were beating the indices. As a result, once there was a comfort level that the market had hit a low for the time being, those fund managers began buying those stocks that typically move more than the market, whether it is going up or down. It is a lot easier to beat the percentage increase in the overall market by buying a beaten down stock that is washed out vs. buying a "boring" stock that won't hurt you.

Typically, after a structurally led rally takes hold, in order to explain their buying, people tend to put a fundamental spin on the rally. Last year, in the first week of December, a fundamental "buzz" was surrounding Oracle (ORCL) and Intel (INTC). The buzz was that both were showing signs of improvement and that more upside was likely. Sound familiar? Once we understand why the market really rallied, then we won't get caught up in finding reasons for why it might have rallied.

A friend of mine was surprised the other day when I kept harping on how this market is so similar to last year and finally out of frustration said, "Is it going to be just that simple?" I responded by saying "the complicated stuff doesn't seem to be working so well."

If the trend continues, there should be another few days of downside in the market followed by a rally back to last weeks high. Until that takes place, the move is likely to be into defensive issues in the Consumer Staples.
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