Snap Back: Is the Correction Over?
After last week’s severe drubbing in stocks, the mass of buy-and-hold investors out there is starting to let out a huge sigh of relief. I can’t say that I blame them, especially after last Wednesday’s huge 460-point intraday Dow drop.
Since then, the market has made a notable comeback, but does this mean that the correction is over?
I dare say not.
In fact, it’s typical to see a “snap back” rally in markets, particularly after a sharp correction that’s taken the major indices down below their long-term, 200-day moving averages. It should go without saying that markets rarely go straight down, so to see a settling and a subsequent rebound in this market is something to be expected.
To put things into perspective, consider the chart here of the Vanguard Total World Stock ETF (VT). As you can see, equities have seen a nice rebound off of last week’s lows. However, we also can see that stocks remain in a downtrend, trading below key support at the 200-day moving average.
One thing that helped markets gain a bit of ground last week was chatter from Federal Reserve officials hinting that there could be a continuation of quantitative easing (QE). One official even suggested that the market pullback could be a reason to keep printing more money.
My fear here is what this market is going to do if and when the Fed finally does end QE and when interest rates finally start to creep higher.
The Fed aside, we are seeing a rally off of the lows; however, I don’t think that means the correction is over. I expect more downside in the markets going forward, and part of the reason why is because the fears that sparked the latest round of selling still are in place.
There’s still fear of a slowdown in Europe, China and Japan. There’s also concern about the debt load in Japan and in the euro zone. Moreover, commodity prices continue to decline due in large part to slowing global demand. Then, we still have exogenous threats from geopolitical hotspots and, of course, the threat of an Ebola outbreak that would put a virtual stranglehold on economic activity.
So, what’s an investor to do right now?
I think that if you have yet to raise some cash, then now is a good time to lighten up on your holdings and manage your downside risk. If you choose to ride out the latest market storm, then just prepare yourself for a lot of volatility still to come.
If you have already raised some cash, the way subscribers to my Successful ETF Investing service have, then now is the time to start building your buy list. When the market clouds clear, it will be time to get back into stocks at bargain-basement prices.
If you’d like to find out precisely how to protect your assets from current and future downside in the equity markets — and when exactly it’s safe to get back in the market waters — then I urge you to check out Successful ETF Investing today.
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In case you missed it, I encourage you to read my e-letter column from last week about how you can maintain your capital in the face of the falling market. I also invite you to comment in the space provided below.