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Despite Sell-Off, Barry Ritholtz Remains — Cautiously — Bullish

Peter Gorenstein

It's shaping up to be a tough day on Wall Street. At one point earlier in the trading session, all three major U.S. indexes were down at least 1%.

Commodities, including precious metals, also continue their recent slide. Stocks started the day down after the ADP job survey showed the economy created fewer jobs than expected in April. Add to that the weakest Institute for Supply Management report in eight months, and you've got a recipe for a sell-off.

The Daily Ticker's Aaron Task and Daniel Gross spoke about the market with Barry Ritholtz, money manager at FusionIQ and author of The Big Picture blog. Despite the recent weakness, Ritholtz remains cautiously optimistic, because that's been the willing trade since March 2009.

"If every time the market twitched 100 points you headed for the hills, you left a lot of money on the table," he says.

However, for a guy who remains 90% long, he listed a lot of reasons for concern on his blog this morning:

-- Hot money seems to be rotating from speculation to speculation, rather than inflows accumulating longer-term holdings.

-- Traditional measures of stocks (P/E, return on capital) suggest stocks are no longer cheap. Longer-term measures of valuation -- Q ratio, Shiller's 10 year P/E -- show stocks are actually pricey.

-- China is on the verge of rolling over, falling nearly 8% in a single session. That wiped out three months of gains.

-- Defensive sectors -- especially health care, but also staples, telecom and utilities -- have found a bid. Often telegraphing a reduction of buying by fund managers.

-- Way too much cap weight is tied up in a handful of stocks. Apple (AAPL) is responsible for far too much of the Nasdaq gains than is healthy.

-- The rally that began March 2009 -- now well over two years old -- may have gotten ahead of itself.

-- The rampant speculation in silver and its collapse is a reminder that money that piles into a sector very quickly heads out the door even faster.

-- Assumptions about earnings seem to project double-digit gains forever.

-- The end of QE2 removes a significant bid under equities and bonds. It also will allow the dollar to rally, potentially punishing commodity traders.

-- While earnings have been good, future guidance from companies is starting to moderate. This does not bode well for earnings supporting S&P 500 1400-1500 future levels.

-- Speaking very generally, the low volume markets just feel tired here.