Lots of investors have been waiting for a correction, arguing that no market can go only straight up and that the longer stocks go without a 10% correction they riskier they became.
Well, it looks like we might be about to get that correction.
The Dow Jones Industrial Average fell 200 points on Thursday January 21, for the worst two-day decline since the last correction in mid-June to early-July 2009. The Standard & Poor’s 500 Stock Index closed on January 21 down almost 3% in two days. That’s the index’s worst decline since a slide in October.
During the rally that started in March 2009 corrections have been short and shallow with declines in the neighborhood of 5% rather than the more typical 10%.
This time I think I think we could get a decline of more than 5%. Why do I think that?
On the technical side, the Dow Industrials broke through their 50-day moving average on Thursday. First major support is at 10,200, about 200 points below Thursday’s close.
On the fundamental side, the financial sector, which had been the best performing sector in 2010 before the downturn, has led the market down on fears that Washington will actually pass something that will hurt bank profits. Judge for yourself how real that fear is. We’re talking about Congress here, remember?
I take fears that China is about to begin a significant tightening of bank lending and the country’s money supply more seriously. (See my post http://jubakpicks.com/2010/01/21/sentiment-shifting-on-china-is-a-buying-opportunity-ahead/ ) I think we are seeing the first signs of a tighter monetary policy in China, likely to be made official after the People’s Congress meets in March. Those fears have pushed down prices for the steel, metals, and mining stocks in the Materials sector. (To track this use the Materials SPDR ETF (XLB).)
But I think the first moves in China will be tentative. The government would like to slow growth a tad but we’re talking about attempt at fine tuning to lower growth from the fourth quarter’s 10.7% to something closer to 9%. That’s not a huge change and no really big change in monetary and economic policy is likely in China unless inflation really starts to rip higher. That’s an issue for the second half of 2010 in my opinion.
So far at least—and I don’t think a 5% or even a 10% correction would change this—the longer term upward trends in stocks remain intact. As long as that’s the case I’d use any correction here as an opportunity to put money now on the sidelines to work.
I’ll try to monitor the correction as it develops and suggest some stocks to buy if this works out as I now believe it will.