Is The Correction Finally Here?

Here I sit with the Dow down 130 points, oil up more than $1, and gold jumping $16 an ounce. It has been more than three years since we have had a 10% correction in the market. Is this the start of it? Nobody knows for sure, but it could be.

If you think about it, the 6% rise we have seen in less than 5 months of 2006 defies traditional investment logic. Consider the current economic environment. Interest rates are rising, commodities are soaring with gold at 26 year highs and oil at record highs. Investor sentiment is very bullish. We are a country at war. And yet, the stock market has rallied strongly.

Given that official corrections (10%+) in the market occur about once a year, you would not expect three years to have passed since the last meaningful drop, given what the country is facing and what economic indicators are showing. For some reason stocks have ignored this backdrop. It is a combination of things; strong corporate profits, balance sheets flush with cash boosting M&A and buybacks, many hope that the Fed will stop hiking rates and prevent a recession.

Whatever the reason, it is hard to argue that we are not overdue for a pullback. Our economy is unlikely to withstand all of these pressures forever. Who knows if today is a sign of more things to come in the short term, but I would not surprised if it is, and investors should be on the lookout. There is no need to panic, just be prepared.

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2 Thoughts on “Is The Correction Finally Here?

  1. adam on May 17, 2006 at 6:47 PM said:

    Dont know if you check the old ones for comments or not, but I’d be interested to hear how you feel now, after the huge beatdown the markets got today. Dont get me wrong, I tend to see these moments as major buying opportunities… its just hard to break out the benjamins after personally getting slammed 8% today. Is this just the beginning of a steadier pullback? Your insights would be appreciated. Cheers, Adam

  2. Chad Brand on May 18, 2006 at 8:34 AM said:


    I get emailed when comments are posted on blogspot, so feel free to pose questions on older posts.

    I feel for you with a single day hit of 8%, that’s truly brutal. As for the correction, we are 4% into it thus far. Given that I think we are overdue for an “official” 10% correction, and the economic backdrop currently has been ominous for the equity market, we might not even be halfway through it yet.

    I’m a long term investor, not a trader, and not even traders can tell you where the market is going in the short term, so there’s no way to really know. However, having the market rise 6% in the first 4 months of this year, after 3 years of gains, doesn’t make much sense to me given that we have rising interest rates, a slowing economy, $3 gasoline, a war, record high commodity prices, etc.

    As for stock picking in this environment, I would suggest focusing on stocks with low valuations, as they will have less enthusiasm baked into their prices that could be sucked out by sellers. Also try and find companies that have a secualr trend working in their favor that might help their business grow despite $3 gas, slowing GDP growth, etc. Those firms will still see their stock prices fall, but if their earnings hold up, they will rebound quicker than most and might even not fall as fast as other companies that are adversely impacted by the current economic environment.

    Hope that helps!

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