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If It Feels Like a Recession, Is It a Recession?


Things don't have to start getting better but they do have to stop getting worse for a true bottom to be put in.

"Medic! Medic!" That's the rally cry being heard across the Wall Street battlefield. With the market looking more like triage at a front line Mash unit, investors have to be asking where the morphine is. Even for Hedge Fund managers when every short works and every long doesn't, it can become quite uncomfortable.

Yesterday there was no place to hide. There was no rotation from losers to the new winners. Nothing worked. Stocks at 52 week lows continued their slide and stocks near their highs began their fall from grace. The sick are infecting the healthy.

Pessimism is hitting peak levels and the market is close to and about to cross market lows first set last year. Add to that the high probability of an emergency rate cut and you have the ingredients for a massive oversold short covering rally.

Even when it materializes it won't cure the damage that has been done. Whether the economy is in recession or not is beside the point. For most Americans it feels like one and that's all that really matters. In the end the Fed will do their job despite the fact that this one seems to get its cues from the newspapers. No, the real cure is time. Over the long run the economy has been able to withstand shocks, recessions, terrorist attacks you name it. The US and the economy need to regroup and regain strength before the markets can truly recover. The fundamentals and the economic backdrop don't have to start getting better but they do have to stop getting worse for a true bottom to be put in.

It took the better part of a decade to create some of the problems our economy faces today so I suspect it will take some time to cure them. The good news is that contractions are generally much shorter than the expansions.

Know in advance their will be many of these oversold rally's and trust me during each one you will feel that this is it. The bottom is in and I am not going to miss the rocket to the moon.

In deep corrections the biggest challenge we face is often psychological. We are more concerned about missing the rally than losing money and as a result overstay our welcome with long positions for fear of missing the big bounce.

Risk management has to be maintained. Even if we end up big today being fully invested without the wind at your back may prove problematic. Smaller positions are imperative as company risk right now is high. Stocks aren't going down 4-5% on missed earnings. The downside moves are more like 10 and 20%. Intel (INTC) is a perfect example.

Every smart general knows that you don't keep charging ahead when all your troops are being cut down by machine gun fire. Sometimes you have to pull back until fresh boots hit the ground.
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No positions in stocks mentioned.
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