What to Expect When Correction Talk Hangs in the Air Fears of corrections are part of the normal cycle of events at the stock market. But identifying the correction correctly and whether it could move on to a market crash is important.
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In stock trading and investing, you need to keep in mind that it isn’t always bright in the stock market. Even if there is a period of continued growth that never seems to end, it is seen as abnormal. And a correction inevitably occurs. Trading moves must be planned accordingly. Wall Street just experienced the biggest one-day selloff in eight months. Investors are mumbling about a correction going on, as this Reuters article in Investopedia points out. Investors have been scared of the increasing trade conflict between the US and China. Treasury yields are also part of the fears. On Wednesday, October 12, 2018 the S&P 500 index dropped 3.29% which is its worst single day decline since the month of February. That has brought its loss to nearly 5.0% since it closed on September 20, 2018 with a record high.
Understanding a Correction It does benefit us if we get back to the basics and figure out what a correction in the stock market actually is. According to common investor definition, a stock market correction happens if it falls by at least 10% from the high it has registered most recently. This usually happens when the market has had too many gains. A correction is usually a reaction to such market gains. In the present situation, when the S&P 500 tech sector index sank 4.77%, the fears of a possible correction started getting more severe. This was the greatest single session decline for the tech sector since 2011. And this sector was responsible for the many market gains we witnessed recently. According to President Trump, there is another factor responsible for this, which is the rising Fed rates. The Fed rates are indeed cause for worry for investors. Some of them doubt whether the Federal Reserve would support markets as it has under earlier periods of leadership.
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Corrections Can Raise False Alarms In early February 2018, the S&P 500 had sunk 10% from its high registered in the previous month. That fueled fears about the bull market –that has been around for 10 years - ending. But that proved to be a false alarm, since the market recovered. One of the contributory factors for this was the government’s significant corporate tax cuts. The economy was also expanding. The market then gained by nearly 10% in September 2018 but the rising Treasury bond 10-year yields plus the trade war fears led investors on a retreating path. The economy is overheating, and some analysts consider this as a cooling of the overheating economy with the rising interest rates being the catalyst.
The Longest Ever Bull Run Can’t Keep Continuing US stocks are believed to be in a bull market all the way from March 2009, the longest ever bull run in history. It was a great recovery from the worldwide financial crisis that had ripped apart more than half of the value of the US stock market. The S&P 500 index managed to quadruple and more. It led investors to wonder when this amazing run would come to an end. It wasn’t a doubt actually. They were sure it was going to end. They believed that what goes up must come down, and indeed that’s how it has been with the markets. The only doubt investors had was regarding the timing of the end. Investopedia’s Caleb Silver, however, believes that the volatility of October is only a normal occurrence, and the fact that Q3 was among the least volatile quarters has caused the correction of October to hurt more.
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Lookout for the Quarterly Results of Companies The coming weeks are crucial since that’s when companies would report their quarterly results. That’s when the fears of the S&P 500 sliding to an extended downturn prove genuine or unfounded.
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