5 Things To Ponder: Is This "THE" Correction?

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

On Tuesday of this past week I posted an article entitled "No One Rings A Bell At The Top" wherein I stated:

"The current levels of investor complacency are more usually associated with late stage bull markets rather than the beginning of new ones. Of course, if you think about it, this only makes sense if you refer back to the investor psychology chart above.

 

The point here is simple. The combined levels of bullish optimism, lack of concern about a possible market correction (don't worry the Fed has the markets back), and rising levels of leverage in markets provide the "ingredients" for a more severe market correction. However,  it is important to understand that these ingredients by themselves are inert. It is because they are inert that they are quickly dismissed under the guise that'this time is different.'

 

Like a thermite reaction, when these relatively inert ingredients are ignited by a catalyst they will burn extremely hot. Unfortunately, there is no way to know exactly what that catalyst will be or when it will occur. The problem for individuals is that they are trapped by the combustion an unable to extract themselves in time."

Of course, what I didn't realize at the time was that, on Thursday, the markets would plunge like a stone sending investors running for cover and the media scrambling for answers.  What caused it? Is this THE correction? What happens now?

This weekend's edition of "things to ponder" is a collection of thoughts as to whether the current correction is just a buying opportunity, or whether this is Redd Foxx's "It's The Big One."

 

1) 5 Reasons Why The Sell-Off Spells Caution by Adam Shell via USA Today

"The biggest downward driver today is the formerly high-flying biotech sector. The iShares Nasdaq Biotechnology ETF is down a whopping 5.5%. Other so-called momentum stocks, such as social-media darling Facebook (down nearly 5% today), video-streaming play Netflix (off 4.3%) and electric car maker Tesla (down 4.5%).

 

Ouch.

 

Why the sell-off, and why now? Some theories: The stocks got too overheated; the stocks were over-loved; the stocks got too pricey and had to come crashing down to earth."

2) Don't Let These Stock Market Gyrations Scare You by Howard Gold via WSJ MarketWatch

"But the main causes of a genuine bear market — impending recession or deflation, ultra-high stock price-to-earnings ratios or rapidly rising interest rates — are not on the horizon.

 

So unless you’ve borrowed to the hilt to buy Twitter or the biotech ETF, you should stay invested and not lose a minute’s sleep. As far as market shocks go, this looks like a mild tremor, not the big earthquake everybody fears. "

3) Is This The Beginning Of The Crash via Josh Brown, Reformed Broker

"Not every sell-off is 1929 or 2008. There’ve been 27 corrections since World War II for US stocks in which the market sold off between 10 and 20%. There’ve been only 11 instances in which stocks dropped by more than 35 percent. That’s almost a three-to-one probability that this doesn’t snowball into catastrophe."

4) Deutsche Bank: Bull Market Running Out Of Oxygen via ZeroHedge

"We can't help thinking that as it becomes ever clearer that the Fed is pretty much fixed in its determination to stop QE late this year, the oxygen that has fuelled the 5 year bull market is slowly draining out of the market. Clearly the Fed is still buying a significant amount of bonds and thus providing a lot of liquidity but clearly only for a few more months."

5) Carl Icahn: Fed Saved The Economy But A Correction Is Coming via CNBC

"I'm even talking somewhat against myself but we have a lot of hedges on. as I told you, shorts. I do believe that this market -- you know, everybody loves this market. You go talk to your barber shop and everybody is buying this, buying that and talking about it. That's the time to be cautious."

 

That's not the only reason to be cautious. I think that a lot of the earnings are sort of artificial because, you know, the Fed did a great job in saving this country. But right now with these low interest rates it's easy to make earnings and I don't think that can continue forever...I've said that before and i continue to say it, I think that there will be a major correction, but i don't know when. It could be three years. It could be three days."

 

Bonus: Revisiting Price Compression by Cullen Roche via PragCap

“Price compression is when market participants price in many years worth of future performance into the current price.  They are, in effect, buying today with the expectation that future earnings will justify current prices.   When you combine this concept with an understanding of behavioral finance and the understanding that market expectations can become irrational, you can build some understanding behind the concept of market bubbles.  As I’ve described before, A bubble is an environment in which the market price of an asset has deviated from the underlying asset’s fundamentals to an extent that renders the current market price unstable relative to the underlying asset’s ability to deliver the expected result.”
Have a great weekend.