I've been saying for a while that I think a major market
correction is likely to happen before too long. My reasoning
is pretty simple: We may be seeing some early indications of
"economic recovery," but we're still a long way from a new
boom. Consider the following:
Unemployment is still really high -- 9.8%
at the end of September, and I doubt that's changed much in
recent weeks.
Consumer spending , which has seen a bit of
a rebound in recent months, is likely to fade as the
effects of the stimulus recede, thanks to that high
unemployment rate. Folks (well,
mostfolks) don't tend to buy big-screen TVs and
new cars when one of the household's primary earners is out
of a job. Low spending means lower sales, which means less
manufacturing, which means fewer jobs, which means lower
spending ... you get the drift. But it also means ...
Lower corporate earnings. Many stocks are
trading at big multiples relative to realistic estimates of
their near-future earnings. History teaches that big
multiples aren't sustainable.
Of course, just because a correction seems warranted
doesn't mean it's imminent. As we've all hopefully learned
over the past decade or so, the stock market can stay
irrational for much longer than we can stay solvent.
But that said, I want to toss out a couple of questions:
Is there any way to tell when a correction is imminent? And
if there is, what, if anything, should we do as investors
when we see it coming?
Can we tell when a big market reversal is
coming?
Remember the dark days of early March? When it seemed
like every single voice in the media was predicting imminent
capital-D Doom for the American economy?
I remember how overwhelming it felt, how
certaineveryone was, how
awfulthe fear felt. And then I remember thinking:
Maybe this is the bottom. If not, it's close enough. I
should buy some of the stocks I've been considering right
now.
It was the bottom (plus or minus a few days), I did buy,
and I made a lot of money. But my point isn't to brag, it's
to say this: That was a great example of what happens when
market trends change. When
everybodyis speaking with one voice, it's very
possible that they're all about to be wrong.
So when will the next big plunge happen? I can't say for
sure, but I'll say this: When the last of the curmudgeons
start to get bullish, when the gloom and doom on most of the
financial blogs gives way to optimism, when guys like me
start writing articles about how good things are going ...
look out below.
So what? Market timing is a fool's (not Fool's)
game.
Market timing is not something to build your investing
strategy around; last I checked, predicting the future wasn't
exactly a reliable science. But personally, I find it useful
to keep an eye on stuff like this because it helps me think
about when to buy (or sell) stocks that I'm inclined to buy
(or sell) anyway.
Think it doesn't matter much? Here are some stocks that
were good buys in early January, but
greatbuys in early March:
Stock
Value of $10,000
Invested on 1/2/09
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