The Correction Has Started

For the last couple of months we have been writing about the potential for a correction. That correction, up until now, has remained elusive for a variety of reasons from the ECB's liquidity injections, psychology, performance chasing and low participation in terms of volume. However, as we have stated previously, "reversions to the mean", or moving averages, always occur. It is this simple reality that is continually disregarded by the mainstream chatter that continually leads investors to buying high and selling low.

As I wrote in this buy signal back in October of 2011 and then confirmed in late December. However, we are now rapidly approaching the end of the seasonally strong time of the year which tends to mark the end of bullish advances. 

As we stated this past weekend: "This is not an absolute prediction but a possible outcome based on weakening profit margins, employment and potential for a resurgence of both the debt crisis in Europe and another debate surrounding raising the debt ceiling prior to the election. Oh, and the election itself." The headwinds that are mounting currently limit further advances in an already very overbought and liquidity driven market.

The correction last week, the employment report on Friday and today's decline have all brought forth the trumpeted calls for more easing. While there is hope that the Fed will once again come to the assistance of Wall Street the negative impacts to Main Street through higher inflationary costs are an overriding concern by the Fed. With core inflation already running well into the upper end of the Fed's target range there is little room for the Fed to aggressively act monetarily. While the market so far has responded positively to the Fed's innuendos and suggestions there will come a point in time where inaction will have a consequence.

Currently, the bullish trend is still intact. However, realize that the trend can change very quickly as we witnessed last summer. If the current bullish trend ends then there will be plenty of time to rebalance portfolios and reduce exposure accordingly. Likewise, if this is simply just a "dip" that leads to short term oversold condition then allocations can be increased accordingly. However, the worst thing that you can do as an investor, is to make portfolio movements based on assumptions and volatile market movements. Smoothing the daily market movements with weekly analysis smooths out the day to day volatilty and helps reduce costly emotional mistakes. Slow and steady wins the race both in life and in investing.

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Written By: Lance Roberts