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On technical analisis can we expect a 10 percent correction soon?

Sep 01, 2014 by Armando from Carolina, Car in  |  Flag
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Since World War II, the S&P 500 has averaged a 10% correction every 344 days. We’re now over 1,000 days since the last 10% correction going back to October 2011. There are only 4 other times during this almost 70 year period when the market exceed 1,000 days between 10% corrections.

Two of the most recent 1,000+ day extended rallies coincide with elevated CAPEs (discussed below). The S&P rallied for 2,553 days from October 1990 to October 1997 before it had a 10.8% correction. In October 2007, the S&P 500 had gone 1,673 days before a correction of 18.6%.

The current CAPE of approximately 26 is in line with the 1997 & 2007 markets. That is about 54% above the historical average of 16.6. In the last 100+ years, we’ve only been at this level 3 times and a crash eventually followed each time. This includes the crash of 1929, 2000, and 2007. The market was in such a historic bubble in the late 90s leading up to the 2000 crash that the market continued to go up for about 2 years before the eventual crash in 2000. That’s important to keep that in mind because correctly identifying a bubble is one thing and knowing when it is going to burst is another.

Comment   |  Flag   |  Sep 12, 2014 from Austin, TX

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Layton Jacob Cox Level 11

Tough question....purely because no one knows. I'm not sure what you are referring to by the phrase: Technical analysis. If you are speaking of the Shiller P/E, then the answer is: maybe.

The stock market is extremely unique. It's the only industry where everyone has their own thoughts and own predictions. Ultimately, it's extremely unlikely that someone "calls" the market moves perfectly.

I'm assuming you are asking this question because you want to make money or protect your current savings. My advice to you on that, is to stick to your plan. Surely you had a plan on why you bought this and why you sold this. If not, then contact a financial advisor and start one.

Your plan should be stress tested for the best of times and the worst of times, so even if the market drops 50%: Your plan should be ok. If this isn't the case, find a better financial planner.

I know this isn't the answer you are looking for, so sorry about that.

Comment   |  Flag   |  Sep 04, 2014 from Tucson, AZ

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Technical analysis uses the past to predict (well, try to predict) the future. In other words it's saying what has happened will happen and this is completely unfounded logic. Markets are controlled by supply and demand, so what has happened with supply and demand will not predict what will happen with supply and demand.

Layton is right, stick to your plan. If a 10% market correction would cause you to change your plan, then you should reevaluate your plan now. If you don't know what to do then search out a couple of fee-only financial planners in your area.

To directly answer your question, sure we can expect it, we can expect anything, it's either going to happen or it won't happen. But no one knows, so stay with your plan and only readjust your plan if your risk/reward profile changes.

Comment   |  Flag   |  Sep 04, 2014 from Lemont, IL

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Jim Hyre, CFP® Level 7

Armando, you are certainly not alone in asking this question. Market “Experts” have been calling for a 10% to 20% correction for most of this year, due to high valuations and/or some form of technical analysis. Are they correct? – No one truly knows.

I would agree with the comments by Layton and Michael – There are many different forms of Technical Analysis, and none of them are perfect predictors of what will definitely happen in the market.

My advice to anyone who is investing in the stock market is to start with a good understanding of your investment goals and timeframe. If for example, your investment goal is saving for retirement, which is 10 years from now, worrying about the near-term ups and downs of the stock market isn’t very helpful – especially 5% to 10% corrections. On the other hand, if your investment timeframe is over the next 3 to 12 months, then you do need to pay closer attention as to where your money is invested, and the potential for any pullbacks.

I hope this perspective helps. Good luck!

Comment   |  Flag   |  Sep 09, 2014 from Columbus, OH

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John Schoolman Level 12

Armando, the markets will go up and down ... hopefully more up over longer periods of time. If a correction is coming, and no one can predict that absolutely, it will be a good opportunity to purchase more investments at a lower cost. John

Comment   |  Flag   |  Sep 09, 2014 from Kalamazoo Township, MI

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Armando, the answer is impossible to know. I can say that there was a lot less risk in the market back in March 2009 than there is now. As was mentioned above, it has been a very long-time since the last 10% correction. These long periods of little to no correction are more of an exception than the rule. These periods also coincide with the extraordinary interventions by the Federal Reserve and other central banks around the world. It is possible for the rally to continue unabated as long as there is "stimulus" from central banks. An end of stimulus or a loss in confidence in the central banks could spark a severe correction in a very short period of time. It may be prudent to carry a higher level of cash in preparation of a correction.

Comment   |  Flag   |  Apr 07, 2015

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A "technical" correction of 10% is not worth avoiding. You will hurt yourself doing it and it shows that you have let the TV tempt you into too short-term a focus that will cost you money.

Those corrections are very common and the bounce back is usually quick and sharp. By the time you get back in, you'll have missed much of the gain, just like after you got out because you were expecting a correction, you missed out on gains.

A broad market downturn of over 15% is worth avoiding. I personally have a 15% stop-loss but if it is in an individual stocks I just switch stocks. If it is a mutual fund and the broad market is down 15% I will sell until it quits going down and eagerly look for a time to get back in quickly. That helped me enormously in 2000-2002 and in 2008-2009.

But, in 30 years of advising clients, the only other time I got out of the market was the summer of 1987. That is 3 times in 30 years. That is not what most people think of as market timing.

Comment   |  Flag   |  Apr 09, 2015 from Charlotte, NC

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