What To Do With Stock Weakness?

Now that the debt ceiling had been raised, we are finally seeing some weakness in stocks, with S&P down more than 3% since a deal between the Senate and the House was reached on Sunday. While some people might see this as a big drop, S&P actually is just back to the beginning of the year, and still has not reached the 10% decline from its recent high to qualify as a correction. In fact, to know what weakness looks like, one should look at the US Dollar. Amazingly, the best strength in the market is now Yen, Japan's currency, a country with an economy laughed at by Americans for nearly 2 decades. The Japanese stock market has also been doing quite well since its devastation from the tsunami in March. Although the debt ceiling limit had caused much angst in the market before a deal was reached, no one really believed that the US would really default on its debts. With the helicopter team presiding the Fed, no one seemed to think the US treasuries market would get decimated, either. In fact, far from causing US treasuries the need to pay higher interests, people rushed to invest in the default-looming US treasures to seek 'safe' haven, even when other debt instruments such as repo rates, etc. shot up higher. Quite a twisted world we live in now. Now that people are more focused on the slowing economy, with the prospect of government cutting expenses, revealing the true nature of a recovery engineered through the Fed's money printing and government's spending spree, stocks are performing poorly. For people looking for shorts, they can look at companies which had recently broken down because of missed revenue/earnings/margin targets, or because of weak guidance in these metrics. Many of these stocks were recent high flyers with high P/E ratios and growth expectations, but are now filled with broken charts. Examples include Shutterfly SFLY, Akamai AKAM, F5 Networks FFIV, etc. The other category is on emerging market slowing, crimping the growth of luxury retailers such as Coach COH. Of course, the biggest enemy of shorts is the bi-winning Fed, as there's no telling when it will start QE3 no matter how minimal the chance of deflation is and how much food price or gasoline price may rise due to the money-printing. In fact, without the constant anticipation of QE3, the market probably would have dropped much sooner. Investors who are still bullish but do not want to commit capital in this environment should start making a list of stocks they want to buy once the prices dropped to the levels they are comfortable. Another way is to sell naked puts and buy at lower prices, or pocket the options premium if the stocks continue to stay above the strike prices. Another potentially interesting area is now in preferred stocks. Even though the US government does not seem to be as friendly to banks as before, threatening to erect more regulations which might dampen the earnings for banks, no one believes the government will let large banks fail as banks which were 'too big to fail' are now 'even bigger to fail'. Preferred stocks for Morgan Stanley MS and Goldman Sachs GS such as Morgan Stanley's Preferred-A and Goldman Sach's Preferred-A had come down from their recent highs and are yielding > 4.5%. They are floating rate preferred with minimum yields, so even if interests rate shoots up, their yields are still protected (as long as dividends not getting cut, or defaults not becoming a possibility). This is a tricky environment for both longs, which has to deal with the slowing economy, and for shorts, which has to deal with the bi-winning Fed. Tread carefully. Positions: short SFLY