Home About Archives RSS Feed

@theMarket: Time Corrections

Bill Schmick

There are different kinds of corrections in the stock market. None of them are pleasant to endure. This particular pullback appears to be one of the least painful. It is called a time correction.

Most investors are familiar with what I call the "gap down," when markets drop 1-2-3 percent or more in a few days. We had a lot of those babies back in 2008-2009. Then there are the "slow bleed" sell-offs, where the markets drop a smaller amount but maintain a steady grind downward, punctuated by one or two feeble up days. So far this time correction, now in its second month, appears to be locked in a fairly tight trading range on the S&P 500, between 1,340 on the upside and 1,275 on the bottom.

A time correction can provide exactly the same outcome as its more dramatic (and debilitating) cousins. Remember why corrections occur in the first place. At a certain price level, sellers believe the risk of holding stocks is too high given the perceived investment climate. There are several reasons that the bears want to sell: Libya, higher oil prices, the simultaneous fear of both inflation and slower growth, and stocks are extended and overbought. Sellers believe that the level of the S&P 500 is an attractive price in which to take some profits.

Then there are the buyers who believe the oil price will retreat as Middle East tensions dissipate over time. These bulls see the U.S. economy growing, unemployment falling and the Fed's QE 2 continuing to provide support for the stock market. The bulls are looking for deals and are not willing to pay anymore than 1,300 or so for stocks as represented by the S& P 500 Index level.

As new developments (negative or positive) come to the forefront, the buyers or sellers will react on any given day by pushing the averages up or down. What is important here is that over time (if the news remains the same) all the sellers who wish to sell will finally do so, leaving only buyers. At the same time the overextended, overbought condition of a great many stocks will have run its course leaving them in a condition to resume an uptrend.

Could stocks break through this range either up or down?

Of course they can and often do. In bull trends, such as the one we are in right now, it usually signals a selling climax. I don’t advise holding out for some climatic sell-off in order to buy this dip but rather accumulate equities as we trade closer to 1,300 and avoid chasing stocks on the upside unless some definitive solution to the Libyan problem suddenly materializes.

I personally believe that either Gaddafi will melt away, like the Wicked Witch of the East, or flee to Venezuela to his buddy Hugo, the Wizard of Venezuela. Oil prices will decline and the markets, now refreshed by this pause, will take you and me on a rapid and exhilarating ride higher. 

In the meantime, patience would be a virtue that I would cultivate during these somewhat volatile times. If that doesn't work, just stop eyeballing your portfolio every few hours and do something productive instead, like e-mailing me your investment questions.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

4 Comments
Tags: corrections, bears      

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Cheshire Selectmen Want to Take Inventory of Appointed Positions
Pittsfield Residents, Officials Frustrated With Cell Tower Action Plan
North Adams Airport Manager to Resign
MCLA Receives Grant from National Endowment for the Arts
SVHC Welcomes New Legal Counsel
UPDATE: Pittsfield Firefighters Recover Body From Pontoosuc Lake
Starr Williams: A BCC Success Story
SVHC Schedules Vaccination Clinic Saturday
Hoosac Valley Gets STEM, Curriculum Grants
Thursday Morning Fire Severely Damages Pittsfield Home
 
 


Categories:
@theMarket (369)
Independent Investor (450)
Retired Investor (43)
Archives:
May 2021 (3)
May 2020 (6)
April 2021 (9)
March 2021 (8)
February 2021 (8)
January 2021 (5)
December 2020 (6)
November 2020 (8)
October 2020 (7)
September 2020 (6)
August 2020 (6)
July 2020 (10)
June 2020 (7)
Tags:
Stimulus Commodities Economy Pullback Recession Wall Street Election Euro Currency Stocks Crisis Debt Deficit Markets Banks Japan Bailout Taxes Oil Europe Federal Reserve Congress Jobs Europe Selloff Fiscal Cliff Housing Rally Metals Stock Market Interest Rates Energy Greece Retirement Debt Ceiling
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Does Cash Mean Currencies?
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
Recent Entries:
The Retired Investor: A Labor Shortage Solution
@theMarket: Stocks Make New Highs
The Retired Investor: Are Inflation Fears Real or Imagined?
@theMarket: Fed Signals Equities 'All Clear' But Markets Don't Care
The Retired Investor: Empty Oceans
@theMarket: Stocks Hit With Possible Tax Hike
The Retired Investor: Our Hospitals Are in Trouble
The Retired Investor: A Highway of Opportunity
@theMarket: Stocks Grind Higher as Bond Yields Retreat
The Retired Investor: Water Becoming a Rare Commodity