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Is The Correction Over?
Submitted by Lance Roberts via STA Wealth Management,
As I discussed yesterday, the now "official correction" was not a surprise. It was something that I have been discussing repeatedly over the last several months. The only surprise was the magnitude of the opening drop.
The question on everyone's mind now is simply whether the correction is over, or is there more to come?
The honest answer is that no one really knows. The bulls are "hoping" that the worst is over and that the current bull market will resume its upward trend. However, there is ample evidence suggesting that something else may be afoot from slowing domestic and international growth, collapsing commodities and falling inflationary pressures.
Furthermore, from a fundamental standpoint, earnings growth is deteriorating, and valuation expansion has ceased. As I addressed in "Shiller's CAPE - Is There A Better Measure:"
"The need to smooth earnings volatility is necessary to get a better understanding of what the underlying trend of valuations actually is. For investor's periods of 'valuation expansion' are where the bulk of the gains in the financial markets have been made over the last 114 years. History shows, that during periods of 'valuation compression' returns are much more muted and volatile.
Therefore, in order to compensate for the potential 'duration mismatch' of a faster moving market environment, I recalculated the CAPE ratio using a 5-year average as shown in the chart below."
"There is a high correlation between the movements of the CAPE-5 and the S&P 500 index. However, you will notice that prior to 1950 the movements of valuations were more coincident with the overall index as price movement was a primary driver of the valuation metric. As earnings growth began to advance much more quickly post-1950, price movement became less of a dominating factor. Therefore, you can see that the CAPE-5 ratio began to lead overall price changes.
As I stated in yesterday's missive, a key 'warning' for investors, since 1950, has been a decline in the CAPE-5 ratio which has tended to lead price declines in the overall market."
Yes, I know...low interest rates, Central Bank interventions, etc., etc. have changed all that and "this time is different." Let me assure its not. Unfortunately, the truth of that statement will only be recognized after a great deal of pain.
But that is a longer term dynamic that will take some time to play out and does not answer the immediate question about whether the current correction is over.
In such a short time-frame fundamentals and economics are of relatively little value. So we really must focus our analysis on price dynamics.
As I addressed in this past weekend's newsletter (subscribe for FREE E-Delivery):
"The time has now come to start moving more heavily to cash. As I will discuss throughout this weekend's missive, including the 401k-Plan Manager, it is now time to 'OPPORTUNISTICALLY' REDUCE PORTFOLIO ALLOCATIONS.
As noted in the chart below, the markets are now once again extremely oversold."
"As I have often stated in the past, by the time a market signal is given in the market, the markets are very likely at a point of extreme oversold or bought conditions. Therefore, it is always better to use the subsequent relaxation of those extreme conditions to add or reduce portfolio exposure.
This is why it is never a good idea to 'panic' when something initially goes wrong. With the markets now deeply oversold, it is VERY likely that the markets will bounce next week. The problem, for those with 'buy and hold' bullishly biased strategies, is the 'bull market' has now ended...at least for now.
As shown in the chart above, the bounce from these oversold levels will run into a substantial amount of overhead resistance where the rally will very likely fail. THIS WILL BE THE POINT to take some actions to rebalance/reduce portfolio equity risk as needed.
Important Note: I am NOT suggesting that one liquidate all holdings and go solely to cash. However, I am suggesting that if the recent market decline sent shockwaves through your nervous system, you likely have an excessive amount of "risk" in your portfolio. It is also just good portfolio management to take profits from winners (let winner's run) and sell laggards (cut losers short.)
To put a post-crash rally into perspective, let's take a look some previous crashes to see "what happened next."
1987
After the initial crash in 1987, a 36.4% drop from the peak, the markets immediately bounced back to previous resistance levels, and the began a more normalized decline back to the previous lows.
This is not surprising as investors caught in the initial plunge are "psychologically traumatized" and look for an opportunity to flee to safety. The subsequent two-year recovery back to old highs became more volatile.
1998
Very similarly, the crash in 1998, spurred by the "Russian Debt Default", consisted of a 20%+ dive from the previous peak only to find support at the lows from the beginning of the year.
The initial bounce from the lows failed once again, as investors fled for the "safety" of cash, and new lows were found.
2010 and 2011
While the media has been pointing out the similarities of Monday's 1089-point plunge to the May, 2010 "flash crash;" the 2011 "debt ceiling debate" crash is also worth noting.
As noted, in both cases the markets suffered substantial declines to test previous support levels. The difference this time was that the declines were halted by the Federal Reserve's monetary interventions. However, importantly, in both cases, the initial decline led to a sharp bounce before the markets then set new lows.
There Is A Difference
In all cases above, valuations were in expansion mode as shown in the 5-year CAPE ratio above. The difference this time is that valuations are contracting which is more historically coincident with the onset of much deeper reversions.
The sharp "reflexive" rally that will occur this week is likely the opportunity to review portfolio holdings and make adjustments before the next decline. History clearly suggests that reflexive rallies are prone to failing and a retest of lows is common. Again, I am not talking about making wholesale liquidations in accounts. However, I am suggesting taking prudent portfolio management actions to raise some cash and reduce overall portfolio risk.
If the next decline finds support within the confines of the ongoing bull market, equity risk can simply be increased. The penalty for being underexposed initially will be minor within the context of the broader trend.
However, if the six-year bull market did indeed just conclude for now, you will be thankful for having a bit of extra cash in coffers.
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it was just a preview
I'm hoping that the worst is yet to come.
They are making dead cats out of Flubber now, you know..
"Correction"...it's what the Zionist jew media keeps repeating, so you know it's a fucking lie.
From "nothing is wrong" straight to "it's over"...
From one old phart to another; trust me, it will come. This was merely an appetizer.
The Shemitta is still almost 3 weeks out.
A dead cat can only bounce so many times.
lol, as many times as the zionists feel they need to squeeze the short sheeples
Was it over when the Germans bombed Pearl Harbor?
No,,, It was over when the Nippon's bypassed the Maginot line and took Paris.
Was it over when the Germans bombed Pearl Harbor?
Thanks - i needed to flushout my sinuses with coffee.
According to the ultra short paper bets, the S & P is fibbing.
will test new highs, everything is still awesome, nothing changed.....people have good jobs and no cc debt
In America this would be true but we are the United States right now.
That is a very important distinction, America ceased and the United States began when the federal Government took control of the States at gun point during the Civil war. This was furthered by the bankruptcy and emergency war powers act in 1933. Remember before the civil war you had Citizens of States a NY state citizen that could move and become a North Carolina citizen, after you had United States citizens.
Oh so thaaaaats why the progs want the confederate flag gone.
Yep and it is why I try to tell you that a political candidate is running for a seat in the United States Corp board of directors. Have you heard any candidate mention what we are discussing right now?
This is why all politicians and candidates are a false hope. We need to believe in one another instead of a politician who is clearly in it for the money. Plenty of candidates got elected that were poor to middle class and are now super rich. Why is that?
I am not attacking you I just know Rand Paul is your man. I have never met you yet I would put my fate in your hands before his. This is why we need to be able to trust one another. Once that happens we can reestablish our republic or at least give it a try again.
CEO or Virtu HFT firm was just on Bloomberg tv... The executed 16 million trades yesterday... let that sink in...
was on CNBShit too...
just looking at him u can tell that he's a sociopath...
trying to convince everybody that they r providing a service to "investors"...
id like to shank that fucking prick.....
I don't know what to think.
Look to the yen. If you think the yen will continue to debase, ask yourself how much and how quickly. If you think the yen will streighten the same questions apply.
Look to the yen. I
Have an algor that will will produce a libor forward curve and the necessary credit spreads to predict, faitly acuurately, (like within yen pennies) what the FX for the yen will be down the road..
Only problem with the algor is it relies on an organic market, at least as organic as a pre-Glas Stegal "repeal" market, ya know, like back when hedge funds and swaps were thought of as rate or currency insurance and the Central War Exchanges, and their "nobility" weren't rigging cofi rates with extreme prejudice..
Deze daze, an "expert" market algor would need to predict narcissist behaviors, like gas lighting, hovering, etc etc.
The Doom has barely begun....
oversold - what a joke... did central banks sell?
Please just let this end, i can't take much more of this purgatory
Purgatory would be a shining beacon of bliss compared to this.
I think not. This market is now like a stuck pig.
There will be lots of squeeling on CNBC and Mainstream, but like and any stuck pig, if you've seen one, it will be up and down and all over town spewing blood to the very end.
I would just get out of its way for now.
the real money is in the volatility.
Was it over when the Germans bombed Pearl Harbor?????
I sold in May and went to the beach for the Summer....
Wow!!! A correction that lasted all of about one official hour.
By definition a correction is a fix of an error. If something is corrected it can not go immediately back to the state before it was corrected. By definition that means it is once again an error that needs correcting again.
We are living in the most insane time in history across every facet of existence.
$150k for one acre of land in rural Massachusetts 3/4 covered in swamp. ON WHAT FUCKING PLANET DO THESE PEOPLE LIVE!!!!!!
An acre in Detroit proper is probably $3,000. C’mon in. Bring a hoe and farm.
don't be silly they already got a lotta ho's up there already.
Leave your goats, however.
$3
When i visit New England, the lower tier states are OUT.
I can sell you 20 acres of hardwood forested land for 25K.
I bought 2 acres on Lake Michigan three years ago for 52K.
Is there gold or oil on the property?
when the paper pushers are hanging from lamposts and productivity and commodities are once again respected then it will be over
What correction? It dropped, the plunge team interveined, and it's back where it was.
It's like that Tom Petty song about the toilet backing up; "It won't go down".
Chorus "you can poke with a stick, you can plunge all around, but it, .... won't go down."
Dow is down 12% from all-time nominal highs earlier this year. Is it in a correction or bear market? I don't know that there is an "official" time frame to define those terms.
Not that it matters. Correction and bear market are anachronisms from a distant past. What some call markets are a just part of the global casino.
The market is fading fast as predicted. Watch, all 3 indices will close in the red by 4PM today.
Markt got a good start today due to rule 48 PPT can set price and not have to pay for it great futures pump-problem were all starting to learn the tricks,the algos will as well
Everybody be freaking out about market this and correction that.
I'm just over here like: "That latest batch of ammo come in yet?"
This is a dead cat bounce.
Is the correction over? Are we down to S&P 666? No? Then the correction isn't over.
"Is the correction over? Are we down to S&P 666? No? Then the correction isn't over."
S&P 666 was at 2008 FRN supply levels. Consider how much the FRN supply has increased since then. Now reprice.
Supply means nothing if the velocity of money still continues its slide downward.
BREAKING NEWS FROM CNBC: JPMorgan Analyst arrested for insider trading.
I don't understand.
It's not a ring-leader, just a token Indian scapegoat guy.
http://www.businessinsider.com/jpmorgan-analyst-charged-in-insider-tradi...
He is just a pimple on an elephants ass.
He pissed off the wrong guy, got a swift kick in the nuts and out the door.
They do that every once in a while, for show.
Check out the way the US stock market fell in 1929. It wasn't all at once; in fact, it took 3 years to bottom out. It fell 50%, then retraced half of that lost ground before falling 50% from the new point (more or less). That happened about 7 times and by the end, the market had lost about 90%.
So I guess the question is: Is this a correction or a major crash?
the Dow wants to rollover...but they just wont let it...
everytime it tries to dip down below the 200 point line someone rushes in to push it safely up over 200 plus gains....
http://www.marketwatch.com/investing/index/DJIA
fucking joke.....
Frankly, I don't know what all the bulls are excited about today. Best I can tell it's an example of the 50% rebound rule from any sharp drop like the one yesterday - and even that seems to be fading. Maybe they should halt the market now to hang on to what little gains they have before the Chinese investors start raising cash to cover their margin calls in their next rout.
I really hate those two day corrections.
The decline didn't send any shock waves through MY system. In fact, I bought another 100 ounces of shiny on the dip. Go ahead, drop lower....make my day!
Looks like the SEC is trying to prove their worth. An analyst from the morgue was just arrested for insider trading.
their hustler magazine subscription must of expired
The insider trading must be kept inside. Here endeth the lesson
Fact is, we are a c**t hair removed from the next leg down.
Dead cat bounce isn't even a whole cat.
Has what caused the fall been identified and rectified? No. China is in a mess, and no amount of bandaids is going to solve the structural problems in China that quickly.
Do the markets reflect this? Only when they're allowed to. In other words the rally we have seen has nothing to do with the structural issues in China being solved.
Include legacy debt problems in Greece, Italy, Spain, falling demand for oil, the problems in the BRIC nations................
I like what Lance wrote: 'if the recent market decline sent shockwaves through your nervous system, you likely have an excessive amount of "risk" in your portfolio.'
In other words, if you aren't currently able to stand back and laugh at this ridiculous shitshow because you have too much money invested... then you need to de-allocate some of it until you *are* able to do that.
This is a BEAR MARKET
The extraordinary behavior of the News Media shills .... is their astonishment that a "bear market" can even exist. Surely it must be a "correction", right?? And we will wake up tomorrow, and this bad dream will be over.
Watch the Dow today. It is not closing with a major upwards swing. And fortunately, a lot of Americans who STAND TO LOSE their 401k's are not listening to "The Donald". Do not hold your portfolio. Adjust defensively, and fast.
This was a "taper-trim" haircut. Next time it will be a to the skull head shave.
Wonder what they will call QE4?
My money is on "Green Shoots Up The Poop Chute For American Freedom and Sovereignty Act!" I expect it will be sold with a side order of terror mongering and beating of war drums in the direction of Russia & China.
Every "crash" is as manipulated as every boom. Money is pulled from markets by bankers - as has been happening the last few months - and a crash results.
They can start wars, destroy economies, ruin businesses, dethrone rulers - all of which bankers have done and practised many times.
You can figure out why all by yourself.
In the end the banksters are still human, must be why the fear the general population being able to own guns. They may have security, but do their minions? Or do their minion's minions have it? Bottom line, we are just one Carenton Event away from everything going back to zero.
If the e-mini h&S pattern since 18:00 NYT yesterday continues to form, then we should see another little bounce up over the next 12 hours with a top < 1948 and a test back down to 1920 with a break down to 1880 - more or less. Just using eyeballs and imagining that TA actually works. heh. This means we will se the move down begin around when Europe opens tomorrow. Now where are my rainbows and skittles?
Oh well. Really small RH shoulder. missed by 12 hours. Early is the same as wrong. Good thing I had a small UVXY on from this AM and can close it now for 25% profit.
Risible, don't be ridiculous. Of course it's not over. Stop the nonsense & panderring to scripted the narrative . Conquest or Consent or Insurrection. Ridicuous to even assert or suggest anything else.
The stupid continues to burn.
Which correction? this little move is mere noice.
Over? Shit hasn't even started. Get real.
It wasn't a correction not even over sold!!!!
Near death experiences can have different effects on people. One is to be scared and never ever do anything like that again. The other is to feel bulletproof, almost immortal, throwing ALL caution to the wind.
Sometimes I think these oscillations are a deliberate way to desensitize us to our perils. A new normal where we can see massive swings in the market, always righting itself with the only losers those who sold at the bottom. Every person you hear speak on the issue firstly always tells us to NEVER sell. Just wait it out and it WILL return.
Hotel California for sure...
So a guy I work with was gloating this morning that he was glad that he didn't sell after/during Monday. I looked at him and laughed and said this is just a taste of what is to come to which he responded, "I know about your conspiracy theories." I asked him to explain what Quantitative Easing was as well as mark to market accounting, or the lack thereof. All I got was this stupid blank stare.
These sheep motherfuckers are doomed.
Ahh thee old " Conspiracy theory " argument, want to shut him up real quick? next time he pulls out that " Conspiracy " card tell Conspiracy is failure to think, now have a nice day Dope.
Next time tell him/them that all the conspiracies turned out to be true. Then walk away, and don't mention it again. Just let it sink in.
No.
Plunge protection team please return to your work stations IMMEDIATELY!
.... aaand it's already back in the red.
Yep,no doubt about it, this was a burp comapred to the skull fucking that's due...
This is a flea on an elephant's ass compared to what's coming. Look out below!