The equity and high yield bond markets have rallied quite strongly since the December 24 bottom. It took us a bit of time to figure out the rally was for real, but when we finally did, we focused our ideas on the bullish side of the equation. That has worked nicely as many of those bullish trade ideas are now in the black. But now we think the risk of a correction is significant. It is important to remember that price rarely moves in a straight line. It moves, then corrects, then move in corrects. This process keeps investors on their back foot which helps maintain risk premiums and therefore positive rates of return. When any market goes in one direction for an extended period of time, people often become complacent as the profits come easy. Once the last of the buyers do their thing, a correction ensues and the investorrs who see easy profits often see them disappear.
