Even though I said in the middle of 2009 that I would not make macro comments on the market, I think the correction we have seen over the last few days warrants a view.

The correction started with a tightening of credit by China followed on by Obama's view to curb proprietary trading by US banks.   The views of US market observers is mixed.  Some think given the recent loss of the Massachusetts Senate seat to the Republicans means that President Obama will not be able to push this policy change through much like his health reform bill.  I think this finance bill has stronger Congressional and Senate support given that the US finance sector caused the near collapse of the financial system as well as the weak US economy.  An eventual passing of the Bill will curb global liquidity and with it liquidity premiums.

The net result of the China credit tightening and the Obama financial reforms pushed the "VIX" index higher overnight (see chart below).  We should continue to watch this because a further rise in the VIX toward the 30 level signals greater market volatility ahead.  We are already seeing some flight to quality with the strengthening of the US$. (see chart below).

What does this mean for stocks and this correction ?

I spoke to a Hedge fund manager this morning (they could be a dinosaurs soon facing extinction if Obama has his way or at least reborn in another structure).  He thinks more volatility ahead and a further 10-15% correction in global stock market indices.

I dont have a view on this as its technical.  But looking at our own STI Index - the index recently cut through the 50-day moving average and is nearing the 100-day moving average.  A breach of that could signal further downside.  Does anyone have a technical view to share with us ?

Correction provides  a BUYing opportunity

I think this correction provides a BUYing opportunity as economies and corporate earnings are improving around the world.  Its a question of timing your entry into the market.  As I said earlier this week, if you continue to focus on value and growth plays with sound balance sheets - you should be better insulated from the rise in volatility.  Dont forget hedge funds and proprietary traders tend to focus on the blue chips which are also the more liquid stocks. These are likely to see more downside price weakness as reactions to Obama's proposal gains traction.

For what to focus on to accumulate - you can put the stocks in my model portfolio/stock picks on your watch list and wait for markets to bottom out and become more stable