Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Monday, 29 September 2014

A Correction Overdue?

17:33 No comments

Lots of analysts these days are talking about a possible and looming correction that has not occurred over the past 3 years of the bull market.

Historically, a correction occurs almost every 12-18 months. We have not experienced 1 for 3 years and this has lead to many people worrying about a correction and guessing when it will hit.

My view is that, a correction will not hit us anytime soon, at least not till the December arrives. 3 reasons I have to support this view.

1) We need to know what a correction is and what constitutes it. A correction is a pull back of the stock market (usually 10%-20%), a normal and natural phenomenon. It occurs because the stock market has grown ahead of the economy and hence a pull back occurs to level both of them.

The US economy is currently growing. Though it might not be as good as others have predicted, but nevertheless there is still growth - better housing figures, high profits etc. The stock market is also not performing extraordinary well. In fact, the S&P 500 year-to-date recorded a near 7% increase, which while is not fantastic, it has still gone up.

So the economy and stock market this year are both going through slow and steady upward trend, with no one leading by a lot, which is good news.

2) All 3 major US Indexes (S&P500, DJIA and Nasdaq) are going through several days of reds and several days of greens for the year while reaching new highs. The stock market is going like zic-zac pattern trending upwards instead of a 'only-up' upward trend.

It is way better to see a zic-zac pattern with ups and downs than to see a 'only-up' chart. When there are ups and downs, it means that market participants are pretty balanced on both side, which help keeps prices reasonable and ensure that the stock market does not go crazy and run ahead of the economy. It is only when we see a 'only-up' chart where we need to be panicky because that means that everyone is optimistic and no one is on the pessimistic side to keep things balanced - that is usually a reason why corrections occur.

3) It is already priced in by almost everyone, and what is priced in cannot really happened - it technically had already happened. Almost every analyst I hear are talking about a possible and upcoming correction because it is long overdue and must occur. The fact is, there is no such things as "MUST" in the stock market, it is a probability thing and I must say that judging from the current situation, I really do not see a correction coming.

If most analyst says that a correction should be coming soon and they are pretty much prepared for it, I would say that it is already priced in. So while I do not expect the stock market to be up a lot this year, I do think that we probably will not see a correction at least till December - 2 months of market performance to enjoy!
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