Searching for Positive Catalysts and Silver Lining

My earlier post outlined the reasons I believe this tape is irrational. This correction is focused on events outside of US, as opposed to the last major sell off when there were legitimate concerns about the economic and monetary crisis happening right here.

We are now unquestionably in a DOWN TREND...and it could be just as powerful as a bull market trend. If you are uncomfortable analyzing these type of markets, just change the red color to green on your quote screen and turn the charts upside down. Seriously speaking, this market is clearly not responding to any good news and takes any kind of negative news as a reason to sell. This is a classic example of a correcting market.

After outlining some risks and concerns, let's focus on the positives and possible catalytic events that can stop this downtrend and provide some stability to this tape.

First of all some silver lining.

The stronger dollar is not bad. No longer do we have questions whether the world will chose another currency to replace the dollar. Are you kidding me? Euro? Yun? Yen? Ruble?

Secondly, we can now once again consider traveling to Europe. Yes, you will still pay $5 for espresso, but its better than paying $8. Of course, it also puts the pressure on our trade with Europe and we will likely see fewer Europeans leaving with suitcases of Saks and Tiffany's stuff. At the same time, European economies may benefit from the weaker dollar.

Thirdly, the US economy and the economies in Asia and Latam are healthier than last year and are unlikely to get pulled into the economic crisis because of the debt problems affecting Europe. Despite the fact that only ~5% of our GDP is tied to Europe, our markets are taking a full blow, as if the problems in Europe are guaranteed to spill over here. The probability adjusted scenario has clearly more than priced this risk in with a 10% correction.

The interest rates in US will likely remain low longer than I originally thought. Given the turmoil, I don't see how the FED will find the will to raise rates. This is positive for corporate and municipal borrowers as well as real estate.

Chinese are now beginning to realize that they really need to be careful in terms of new policies. Hopefully, they are realize that there are many eyes on them (and i am not talking about 2.8 billion of Chinese eyes)as the world looking for any signs of slow down in China. I hope that they will remain responsible and find a way not to overshoot when trying to slow down its economic expansion.

Finally, corrections are generally healthy. They are painful reminders that one can't be complacent and can't lose perspective when either making or losing money. Risk control rules in both bull and bear markets. A valuable lesson, that is

Now, about potential positive catalysts.

1)Its all about Euro now - so any kind of intervention or political resolution in Europe that provides the reversal of EURO trend would be positive for commodities and should prop up this market.

2)Corporate buybacks - many companies have rebuild their week balance sheets and streamlined they operations to generate cash. They will likely start using this cash to initiate buybacks.

3)M&A - as valuations becoming much more attractive in a hurry, the savvy corporate and private equity buyers might start stepping in. We have seen a trickle of mergers over the past few weeks, but given that fundamentally most companies are still doing pretty well, we could see a number of high profile M&A transactions. Having said that, do not fall for daily rumors of takeovers. Eight or nine of ten will prove to be false, so don't chase the stock that are up on takeover rumors.

4)Oversold bounce + one of the catalysts listed above - keep your eyes open, a severely oversold market combined with a positive catalyst could provide some hope or at least send the shorts covering.

I was hoping to find at least five potentially positive catalysts, but can't think of any more at the moment. Of course, this market could simply continue to ignore good news and over react to bad news.