The Week Ahead: Market Correction Coming?

 | Feb 04, 2013 12:30AM ET

Whenever there is a big market move – in either direction – the question arises: Is it too much, too soon? I predicted that this week's focus would be on whether it was time for the individual investor to return to stocks. That was a good forecast ---for about two days!

The media tilt ensued very quickly. Since consumers of financial media are looking for actionable advice, the sources have a tilt toward trading. We all know that markets do not move in a straight line, so any significant move brings out those planning to "sell the rips and buy the dips."

Here are three interesting perspectives:

Correction Ahead

Some of the calls for a correction even emphasize the recent shift in fund flows, reflecting the change in attitude by some individual investors. Here is an example from BofA Merrill Lynch strategist Michael Hartnett, reported by The Seduction of Market Timing .

  • The fund flow shift has merely started! Those claiming that the individual investor is buying the market top need to look more carefully at the data. We have had nearly $400 billion in outflows from stock funds during the current bull market. The reverse shift so far is less than $20 billion. It is too soon to call this "dumb money."
  • Felix is still positive. It is true that our Felix model does not try to predict corrections, but he is not far behind when things change. Markets that are theoretically overbought can stay that way for some time. There are a few pundits and managers who have been predicting a correction constantly for several years.
  • The facts have changed. It was only a month ago that many (most?) thought we would go over the fiscal cliff, leading to a recession and a crash in corporate earnings. They also thought that the U.S. might default on debt. These things did not happen, nor did we enter a year-end recession. Isn't that worth six percent or so in market value?
    • Those who set their 2013 price targets before the year-end news need to take a fresh look at the evidence!

    And finally, I am sure that there will be a correction during 2013, since there nearly always is – even during the best years. This is part of my message to every new client. For your long-term investments it is important to "right size" your position. If you are "too big," you will get nervous and bail out when the inevitable and normal correction comes.

    Get The News You Want
    Read market moving news with a personalized feed of stocks you care about.
    Get The App

    Written By: Jeff Miller

    Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
    Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
    Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
    It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
    Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
    Sign out
    Are you sure you want to sign out?
    NoYes
    CancelYes
    Saving Changes