Nobody Ever Said It Had To Make Sense!

Friday, August 5, 2016

Sheila Jamsion and Rich Jamison

Are Stocks Due for a Correction? We revisit the drawdowns, pullbacks and corrections topic when markets get a bit jittery. The media pundits’ cry of “scary” motivates us. Keep in mind that the media’s primary motivation for selecting who appears on TV is selling ads, not forecasting the market. And fear gets more play than greed. Its gurus tout all kinds of things they say mean the market has to fall. But some of them have been pointing to the same factors for several years and the markets kept advancing all through their warnings.

Point One

So here’s the first thing to keep in mind about the market’s action.

Nobody ever said it had to make sense.

Markets rise and markets fall, even when we can find no logical reason. Pundits try their best to explain it. Among the causes for market movements this year, we saw intermittent correlations with the 1) price of oil, 2) strength of the dollar, 3) Fed’s action or inaction, 4) Brexit, and so on. For a while, each seemed to work … until it didn’t.

When markets decline (pullbacks, drawdowns or, when by more than certain thresholds, corrections), it helps to control our emotional response if you remember that they do this routinely. Unfortunately, routinely is not even close to regularly … and the irregularity causes the most consternation.

Point Two

Market corrections happen.

On average, about once/per year … but be careful not to expect one every year. (You can see the past stats here.)

It’s a good bet that if you call for a market decline long enough, someday – eventually – you will get one. We’d put this in the “reversion to the mean” camp of reasoning. We believe most things will revert to mean if you wait long enough. We have also seen that one can find many profitable trades during the waiting period before we get to “long enough.” In that vein, it’s often said that economists have forecast 22 of the last 7 recessions.

Point Three

Corrections are inevitable, but seldom long lasting.

Corrections in the Dow Jones Industrial Average from 1945 through 2013 lasted an average of about 72 trading days. But be cautious about ‘average’ durations. They have been seen to last from a few weeks to six months.

Point Four

Corrections are not predictable.

You (that’s the impersonal ‘you’ – meaning everybody) cannot predict the market – either up or down – with any degree of reliability. Corrections may occur every few months or every several years. Their ‘causes’ are equally unpredictable. What causes one correction may be absent in the next. If you learn to accept this, the media will be much less frightening. (How cover stories have fared found here and here.)

Point Five

Corrections can be insignificant in the big picture.

Many corrections are of minimal negative consequence (day traders and leveraged investments excluded). In actuality, they can be a time to restructure a portfolio to come out at the other end in better shape that it was going in. Yes, corrections can be opportunities for positive consequences.

Take your time. Put your emotions aside. Assess where you are; cull the laggards, take large gains, buy ‘bargains’ among the fallen, etc. See what you have, get rid of what’s weak, sell the large gainers, and get ready to buy (when the tide turns) what could do exceptionally well. Become a logical investor (see how Sheila taught this to Rich here).

In Short

Down markets will occur.

Plan A:

Pay attention to what’s happening instead of predicting what you think, hope or fear will happen. Act according to what the markets tell you they are doing. Use prudent defensive maneuvers and prepare to go back on offense when the time is right.

Plan B:

Give us a call.

Sources: Historical data from dorseywright.com and finance.yahoo.com.

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
All indices are unmanaged and are not illustrative of any particular investment. A direct investment cannot be made in any index.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.Past performance is no guarantee of future results.

© 2016 Jamison Financial Group. Please feel free to distribute copies to individuals you feel may benefit from the information.