Monday, February 3, 2014

The market could use a little panic right about now...

Seriously, we all knew a correction was coming, right? (Although we still gotta get to down 10% [it's officially a pullback at this point]). They say the market has experienced one per year on average, and it's been two years since we've had one. Therefore, they say, we're way overdue.

Here's why this pullback should feel good:

It's happening while the fundamentals and corporate earnings are relatively good---as opposed to occurring when valuations are extreme, balance sheets are over-leveraged, and euphoria is the sentiment going in.

Here's why this one shouldn't feel good:

It feels too good. Meaning there's no panic (virtually everyone's viewing this as ultimately a great buying opportunity). If you want a bull market, you want worry. There's that old adage: bull markets climb a wall of worry. Last year's rally was continually dubbed "the most hated rally in history". That was a beautiful thing, in that it assured that there was plenty of liquidity on the sidelines---bull markets need liquidity.

That said, today's 300+ point decline in the Dow, the volume level (kinda high) and where the volatility index (VIX) (also referred to as the "fear index") sits, tells me fear's on the rise. But not, alas, a panic just yet. Again, as counterintuitive as it sounds, fear's a good thing, but panic (tends to occur at the tail-end of a downturn) is even better.

Just for the heck of it, here's the history of the extended declines (according to CNBC TV this morning) that have occurred since the stock market bottomed in March of 2009:

Total number of pullbacks/corrections: 19
Average duration: 31 days
Average decline: 8%

Does that mean this one has maybe a few more days and a percent or two left in it? Not at all (and keep in mind, those are just averages). It simply means that so far the dips have been bought. Sooner or later we will indeed experience that 10% correction (or worse)---I say the sooner the better. My point being that from these levels and given the current fundamentals, if you had to pick a time for a correction (or worse), now would be perfect. Of course, sadly, you can't pick the time, so don't even try...

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