This spring, I kept seeing the technicals eroding while prices were heading higher and it caused me to position for the downside. That was painful until mid-July but it paid off in the second half of this year. Last week’s market action had a lot of the opposite - prices were dropping while often times I did not see dramatic declines in the technicals. Not only were prices falling, but in many cases the weekly declines were about 10%. I never get into saying something went down “too much” as I am not the judge of what percentage is the right one. But it was certainly extreme.

When that happens, I work really hard to evaluate the merits of the price change based upon fundamentals. If they are still solid and the technicals held up, I tough out the price drop. It’s painful, but over time, I’ve found that it works out for many of the stocks. On the other hand, if I feel the price change was consistent with a weakening of the fundamentals and technicals, I bail.

The thing that concerned me the most last week were hundreds of stocks that had looked great a week earlier and now look terrible. The optimist in me (yes some part of me is not a bear!) says it’s just the start of a lot of cup-and-handle formations and the declines were the start of the handle. I’d like to believe that and I need to give it a little time before I feel confident one way or the other. However, the slope of the declines were extreme and I wonder whether the handles got broken off before they can start to form.