Volatility returned to the stock market in a big way at the beginning of February.  So far the correction, now 8% off the high point has been isolated to the equity market.  There has not been a “flight to quality” that one might expect with such large equity price swings.

While most market pundits talked about interest rates and potential inflation, I think the correction so far was mostly driven by sophisticated trading programs that damaged normal trading action.  These include the highly leverage equity market instruments and computer algorithms that are now unwinding.  It actually may end up being a beneficial shakeout of some “just a little too smart”   structured products that were introduced and re-introduced to the stock market over the last year.

So for now, we are not jumping to a bear conclusion since what has happen so far is the choke out a good bit of speculation that was making the market more dangerous. Hopefully the unwinding of these speculative and artificial instruments will produce a healthier market.

Of course, we will be watching all the asset classes closely for any stress that could change the basically good economic outlook.

Over the last few months, we have needed to sell equities in several cases to get the allocation back in line and reduce select holdings that had just grown too large within the portfolio.

I am not in a rush to enter the market if we see a bounce but there are several sectors that have declined and present some real value.   Conversely, it is realistic to understand the positive stock market in no longer a spring chicken.