Markets never go up in a straight line. The road is bumpy. Pull backs are normal. But investors forget corrections will always appear. While the current correction could take a while, we need to know what we should do during such a tough and frustrating time.
We define corrections a 10% pullback and they come on a regular basis. During such corrections, investors have to decide to stay put and in the market or pull out and risk to lose out on the next move up and miss the next profits.
Corrections come out of the blue. But look behind the headlines. Fundamentals are not too bad. The market is not a bargain but earnings have been strong. We are not in a recession and not many indicators show signals of one coming up. But investor sentiment is extreme pessimistic.
In several of my recent posts I spoke about an indicator I use: The CNN Fear & Greed Index. It shows “extreme fear” of 6. We can go hardly lower than that. I like the CNN Fear & Greed index as a Contrarian indicator because it is one of the most reliable one signalling an imminent move up.
We are up from the lows but the market still has to turn around, so the pessimistic sentiment changes. Be prepared that the volatile correction scenario goes on for a while.
Don’t go to cash. Once sentiment changes, markets move quick. Missing out the first big moves will damage your overall performance in the long run. Short term traders who trade actively can reduce their sizes. Do not leverage heavily, save some fire power and be able to always meet your margin requirements. Smaller sizes keep you in the game, once market moves strongly in the right direction.
For investors with a longer-term view, corrections are perfect times to reshuffle your portfolio. Do you hold cash, you could use it to buy some bargain stocks whose business is doing extremely well.
Every correction has come to an end. Also, this one will! Do not try to time the market, but have a plan and strategy to weather the storm.
Sven Franssen