Market Beat: Are we due for a correction?
December 12, 2013
With the stock market at record highs, there are many pundits who believe that we are due for some sort of a correction.
In the stock market, the term “correction” means a reversal of the trend in prices. The definition of the word correction is, “something substituted for what is wrong or inaccurate.”
Since the stock market has been going up, up, up this year, a market correction would mean a drop. I think we should come up with a different term and the correct direction of the market should be up, but I guess that is just a matter of semantics.
Anyway, it has been a long time since the market has dropped by 10 percent or more, whether you call that a correction or not. We have been about 550 trading days without seeing a 10 percent decline. If you look back at long term averages, drops of 10 percent tend to occur about every 30 months in a bull market.
However, there have been other long periods of time without a major decline. The market went from 2003-2007 without one, and from 1990 to 1997 — a period of 1,767 trading days without a 10 percent drop.
So, just because many people think we’re overdue for a pullback doesn’t mean that it will happen anytime soon. If we do get a decline it could be a good buying opportunity for long term investors.
Right now the S&P 500 is about 10 percent above its 200 day moving average, so even a 10 percent down move would still leave the long term bullish trend in place.
Investors should keep their eye on several issues as we enter 2014. One is when will the Fed begin tapering its QE program and how will they approach the tapering process.
Congress will discuss debt ceiling issues again next month and any decision they make could have an impact on the market. We always have to keep our eye on inflation to see if that picks up.
Interest rates have risen above their historical lows, will they continue to rise? We have been seeing slow steady growth in the economy — it has been termed “the plow horse economy.” Will GDP growth accelerate and will employment growth pick up?
Investors should be aware there are many factors that could impact the market and that corrections of 10 percent or more are normal behavior for stocks, even if you’re like me and think that the correct way for stocks to move is up, not down.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information on his money management service can be found at his blog at http://www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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