Market Correction, It’s Here, Embrace It

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

Market Correction, It’s Here, Embrace It

The Market Is Moving Lower

There are a lot of reasons to think a market correction is coming (happening) but the number one is trade. The global trade environment has been disrupted and the disruptor, Trump, isn’t letting up. If anything, he’s intensifying already hardline tactics in an effort to force change. The latest salvo, a 5% tariff on all goods coming from Mexico, could be the straw that breaks the camel’s back in terms of global economics, it is for sure the event that is sending the U.S. ten-year treasury to new lows.

The U.S. ten-year Treasury yield fell to a new 20-month low. The new low deepens the spread on an already inverted yield curve and signals impending economic recession. The yield-curve, as an indicator of recession, is nearly infallible although its timing is questionable. A look at the ten-year yield chart suggests the inversion will remain in place and may even deepen.

The S&P 500 is now trading at a 2.5 month low and indicated lower. The candles themselves are weak and show little evidence of support while MACD and stochastic suggest lower prices are likely. MACD momentum is bearish, increasing, and well above oversold levels so there is room for the market to run. The stochastic is showing weakness by crossing below the lower signal although it is set up for the index to make a rebound in the near-term. The closest target for support is 2,727, a move below that could lead to much biggest losses.

The weekly chart is incredibly bearish. It shows an asset moving lower from the top of a trading range and that move is supported by the indicator signals. The MACD and stochastic are both confirming downward movement and both are still high in their ranges. Downward movement could last for many more weeks and could take the index down to long-term support targets. These targets are near the December lows, around the 2,400 -2,2500 level, and may be reached by the end of the summer.

Stock Market Corrections Versus Crashes

How to Protect Yourself from Both

A stock market correction is when the market falls 10% from its 52-week high. This may sound like a bad thing, but wise investors welcome it because the pullback in prices allows the market to consolidate before going toward higher highs. Each of the bull markets in the last 40 years has had a correction. It’s a natural part of the market cycle, and corrections can occur in any asset class. 

Current Market Correction

On Jan. 26, 2020, the Dow Jones Industrial Average entered a correction, hitting its highest closing record of 26,616.71. The next day, it went into free fall. By the end of the following week, it had fallen 4%. It recovered briefly before dropping 1,032.89 points on Feb. 8 to 23,860.46. In total, it had fallen 10.4%, and investors were wary of higher interest rates and afraid of inflation. 

Causes

A correction is caused by an event that creates panicked selling, and many beginning investors will feel like joining the mad dash to the exits. However, that’s exactly the wrong thing to do, because the stock market makes up the losses in three months or so. If you sell during the correction, you will probably not buy in time to make up for your losses.

Corrections are inevitable. When the stock market is going up, investors want to get in on the potential profits. This can lead to irrational exuberance, which makes stock prices go well above their underlying value. A correction happens when those prices return to a sensible level.

Correction Versus Crash

In a correction, the 10% decline will manifest over days, weeks, or months. In a stock market crash, the 10% price drop occurs in just one day. These crashes can lead to a bear market, which is when the market falls another 10% for a total decline of 20% or more.

How does a stock market crash can cause a recession? Stocks are shares of ownership in a company, and the stock market reflects investors’ confidence in the future earnings of those corporations, making the stock market an indicator of economic health. A crash signals a massive loss of confidence in the economy. Plummeting stock values reduce investors’ wealth, and a stock market crash may frighten consumers into buying less. Consumer products are the largest component of gross domestic product, as they comprise almost 70% of the economy.

Firms that don’t produce will eventually lay off workers to stay solvent. As workers are laid off, they spend less, and a drop in demand means less revenue, leading to more layoffs.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

As the decline continues, the economy contracts, creating a recession. In the past, stock market crashes preceded the Great Depression, the 2001 recession, and the Great Recession of 2008.

How to Protect Yourself Right Now

The best way to protect yourself from a correction will also protect you from a crash, and that’s to develop a diversified portfolio as soon as possible. This means holding a balanced mix of stocks, bonds, and commodities. These stocks will make sure you profit from market upswings, and the bonds and commodities protect you from market corrections and crashes.

The specific mix of stocks, bonds, and commodities is called your asset allocation; this depends on your personal financial goals. If you don’t need the money for years, then you’ll want to have a higher mix of stocks. If you require the money next year, you’ll want more bonds.

The best way to create the right asset allocation for your goals is to work with a financial planner, as they have computer programs and certain insights that determine the right mix for you. Your planner can also suggest good individual stocks, bonds, or mutual funds that have a proven track record.

Once you are well-diversified, make sure you rebalance your portfolio every year. If commodities do well and stocks do poorly, your portfolio will have too high a percentage of commodities. To rebalance, you should sell some commodities and buy some stocks. That forces you to sell the commodities when prices are high and buy the stocks when prices are low. With diversification, you will feel safe to ride out any stock market corrections.

If you want, you can take further precautions. When stock indices like the Dow hit record highs, sell some of your winners, and hold this money in a liquid account like money markets or Treasuries. You could also buy gold if the stock market corrects. Studies show that gold prices increase for 15 days after a crash. 

If a correction hits, use that cash to buy some stocks at lower prices. You could use dollar-cost averaging to slowly buy back in after the market falls 5%, then again at 10%.

You must protect yourself before prices begin to fall, as a crash often happens too fast to respond. Trying to decide if a correction is turning into a crash is known as timing the market—this is almost impossible to do. Just when you’re sure the 5% drop will turn into a 10% correction, the market may rebound and hit new highs.

History

On average, the stock market has several corrections a year. Between 1983 and 2020, more than half of all quarters had a correction; That averages out to 2.27 per year. Fewer than 20% of all quarters experienced a bear market, averaging out to 0.72 times per year. 

Stock corrections are more frequent than crashes because they occur when the economy is still in the expansion phase. But you may be wondering why the market would correct even when economic data is upbeat. This is because the stock market is a leading economic indicator, and investors look at future expected earnings to forecast corporate profits. They buy or sell stocks based on these projections, and sometimes investors become too optimistic, creating a rally that exceeds current economic performance. That’s when the market gets over-extended. Once that happens, any bit of doubtful news causes a correction.

As long as the future trend remains optimistic, the buying will resume. That leads to an even stronger bull market rally. In other words, a stock market correction can help the stock market catch its breath and hit even higher peaks.

Most recessions occur with stock market declines of 20% or more.   That’s the contraction and trough phase of the business cycle. A crash can create them, but larger economic events are the underlying cause, which is what makes a crash more devastating than a correction.

Confused by the Market Correction? Here’s How to Profit From It

It’s hard to understand stock price weakness when earnings look strong.

The biggest challenge investors face is trying to understand how what’s happening to a company shows up in its stock price. The stock market often seems to move in ways that don’t make sense, given the current investment climate. And although market volatility is inevitable, it isn’t always very satisfying not to be able to figure out exactly what prompted a big market correction.

Many investors are having a lot of difficulty with the market environment right now. With strong corporate performance, companies seem to be doing everything the way their shareholders should want. But those successes aren’t always producing solid returns for investors — and recently, it seems like stocks have been punished even when current performance and future prospects look good. If you can get past that disconnect and stick to a solid investing strategy, then situations like these can produce great opportunities for long-term gains.

Another great earnings season.

Earnings season for the third quarter is winding down, and as we’ve seen earlier in 2020, the results have been exceptionally good. Among the more than 90% of S&P 500 companies having reported their earnings for the period, 78% have delivered positive surprises to their investors, according to data collected by FactSet. When you add up the total earnings for S&P 500 companies, earnings are almost 7% higher than originally estimated.

Image source: Getty Images.

It’s not unusual for the majority of companies to beat earnings expectations. That’s largely because companies do their best to manage those expectations, hoping to reap the psychological benefits of outpacing the consensus earnings forecasts among those following their progress. Yet a figure of 78% is extremely high, in line to be the second-best percentage in the roughly 10 years that FactSet has tracked the number. The figure also marks the third straight exceptional performance for earnings in 2020, as the second quarter set the high-water mark of 80% for positive earnings surprises, while the first quarter weighed in at 78%.

From an aggregate earnings perspective, the numbers are equally impressive. The current projected rise would be slightly less than the 7.5% positive surprise from the first quarter of 2020, but otherwise, it would be the biggest since early 2020.

. but most investors don’t care

Experienced investors know that a stock’s performance generally matches up with its fundamental business strength over the long run. That’s why under normal circumstances, you’ll often see share prices jump after a company reports positive earnings results.

Yet markets don’t always behave the way you’d expect in the short run, and there’s been a big change in perception among investors despite the positive earnings news they’ve seen lately. Even with all the consensus-beating results, stocks reporting favorable surprises have seen gains of just 0.3% in the weeklong period starting two days before releasing their results and ending two days afterward. That’s far less than the 1% bump higher that has typically occurred over the past five years, according to FactSet.

At the other end of the spectrum, investors have even less tolerance for the minority of stocks that aren’t keeping up with their peers. Companies that miss earnings expectations have lost 3.1% on average, versus a typical 2.5% loss over the long run. Even those companies that manage just to match the investor consensus have seen losses of 1.4%, almost double what they’d typically suffer in a more normal market.

Don’t lose confidence

When you own a stock, it’s always difficult to deal with a falling share price when everything the company is doing seems to be going according to plan. Persistent losses even in the face of great business fundamentals can cause you to lose confidence in your investing thesis, and the temptation to sell out can be overwhelming.

Yet over the long run, growth in earnings gets rewarded. You won’t always see it immediately, as metrics like P/E multiples can compress for extended periods of time. But if you have a truly long-term horizon that measures at least several years into the future, then taking advantage of shorter-term traders who don’t focus enough on the big picture can leave you well ahead.

Successful investors find ways to be contrarian at opportune moments. When stocks make moves that don’t make sense, that can open up great opportunities for investors who can get past the noise and concentrate on the true potential a company has for growth.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

Binary Options Trading School
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: