I’ve been warning that a correction was coming for
stock prices for a few weeks now. And no, I’m not trying to point out
that I have any unique insight on this. It’s just that when the stock
market advances in a virtually straight line for 4 months, you start to
think investors and traders will take some profits at some point.

Corrections are inevitable and healthy for stock
prices, like a forest fire that clears out underbrush and old growth and
let’s new growth occur. OK, that may be a little dramatic, but you get
the point.

I’ll admit, the timing of yesterday’s sell-off was
a bit of a surprise. After all, Apple’s 4th quarter numbers
were phenomenal. Yet the stock reversed a gap up and finished the day
lower. I’ve seen nothing in Apple’s earnings or in the analyst community
that suggests there are any looming problems with Apple’s earnings or
outlook.

If anything, Apple investors might be thinking
that it just can’t get any better for Apple. But the scary thing is, I
think it can. Apple’s market is the entire world. And there’s a lot of
people that don’t own an iPhone or an iPad.

These mobile Internet devices are cheaper than PCs
and don’t require the same infrastructure commitments. Emerging economies
will gobble them up.

*****It’s important to remember that
Wall St. has a herd
mentality. They all buy the same stocks, and when the selling starts,
they will all pile in.

I can’t help but think the sell-off that hit
yesterday will be short-lived. Not only was there virtually no immediate
catalyst (other than weak bank earnings) for the selling, we are also up
against January options expiration tomorrow.

To say that bullish options bets outweigh bearish
ones right now could be the understatement of the year so far. And
strange things tend to happen at options expiration.

*****I’d love to say that yesterday’s correction
was over and done, and it’s time to deploy new money into stocks. But I
suspect a little caution is in order. And I say that for two reasons:
banks and
China.

As I said yesterday, banks are not going to return
to the growth they enjoyed in the last decade. Not only has the mortgage
business essentially dried up, but increased regulations are also taking
their toll. Don’t miss the fact that Citigroup (NYSE:C) would not have
posted a profit if it weren’t for loan loss reserves being applied to
earnings.

Of course, lower loan loss reserves is a very good
thing. And that money that Citi can apply to earnings is almost like an
earnings credit that was subtracted from prior earnings. But still, an
operating profit is the goal. And Citi doesn’t have one yet.

I have to wonder about the banks ability to
reinstate dividends. That’s been a major catalyst for the financials. And
if they are deemed unable to raise dividends, it will be bad for the
share prices.

One has to be a bit concerned about Bank of
America (NYSE:
BAC) ahead of earnings tomorrow morning. Don’t forget the bank
ponied up $3 billion to settle some mortgage put-back claims form Freddie
Mac and Fannie Mae. That will likely come out of 4Q earnings.

But there are other entities who may demand a
pay-off to drop their put-back claims. And then there’s the issue of
lower interchange fees for debit card use. All in all, it’s hard to
imagine a strong quarter and strong guidance from Bank of America.

*****Then there’s China. Q4 GDP growth rose to 9.8%. Full
year 2010
GDP growth 10.3%. Impressive. But inflation is also picking up,
hitting an annualized 5.1% in December.

Now, China
has been taking steps to reel in inflation. The
central government has raised interest rates and loan reserve
requirements for banks. There is still an obvious measure that

China has yet to do:
let the yuan appreciate.

I suspect another round of yuan revaluation is
coming. But that doesn’t change the need for
China to slow its growth to
combat inflation. And that should have a negative impact on commodity
prices.

One of the nice things about writing the
Daily Profit every day for the last 3 years is that I
can look back and see what we were talking about last year at this time.
And sure enough, it was
China
and whether or not its economy was a
bubble.

For the record, I was in the “no bubble” camp last
January when the correction began. And while Chinese stocks weren’t great
performers last year, the Chinese economy persevered and helped drive
demand that pushed
U.S. stocks higher.

The inflation issue has gotten more severe
for
China.
And that’s why I suspect yuan revaluation must be on the table for

China. But that
would be a good thing for the
U.S.
economy in general, though, again, it would have a
negative impact in commodity prices.

Last year, the January correction lasted into the
first week of February and took the S&P 500 down about 7%. A similar
move would take the S&P 500 to 1,205, about 70 points lower than
current levels.

I suspect that a drop that big is unlikely, but we
should be on our guard, nonetheless.

*****As always, send your
questions and comments to [email protected].

Published by Wyatt Investment Research at