The Stock Market is due for a Correction

"If it's too good to be true, then it probably is." ~ old saying

Like many others, I hope this rally continues and reaches the highs of 2007 by year end. Ah... if investing were only that easy:-) However, I really don't believe that's going to happen. Instead, I think the current market rally is going to stall soon, providing another buying opportunity for the eventual next bull market. Why? Because I don't think there has been enough improvement since October, 2008 to warrant sustained confidence in the economy... yet. Here's why I think the current market rally is of the bear market kind:

Financial companies are still toxic. The last time I looked, most financial institutions are still holding the infamous CDOs, credit default swaps, and other financial instruments that brought them down in 2008. The financial companies are still carry the toxic assets on their books, which will come back to haunt them in the future.

Right now, these assets are being valued higher than a few months ago, which is helping the financial institutions immensely. However, another economic hiccup will likely drive down the valuations again, and take the financial institutions with them. That hiccup may happen next week when the stress test results are revealed.

Although I swore off buying most inverse ETFs, I am still willing to consider the Ultrashort Proshares Financial ETF (SKF). Last week, I bought a very small position (20 shares) as a hedge against a rapid decline in financial stocks.

Increased government ownership of financial institutions and auto companies. While I have no confidence in the legacy leadership of these companies, I have even less confidence in the government. Unfortunately, I don't believe that government ownership of Citigroup, Chrysler, and GM will turn around those companies. On the contrary, government intervention will just delay the inevitable demise of these companies, with the unintended consequence of extending the recession.

Inflation is coming. Although it isn't here now, I expect high inflation in a few years. With all the government spending, I consider high inflation a foregone conclusions. It's now a matter of if, it's a question of when. However, it seems higher inflation is the minority opinion, for now.

At this point, I continue to stay invested, although I am trimming some positions as the market rises. I am selling profitable positions in our trading account, and selling when our managed accounts gain 5%. For now, I don't have enough conviction to get out of the market completely. However, I do plan to reinvest funds when the correction does occur.

Disclosure: At time of publication, I own the Ultrashort Proshares Financial ETF.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC