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Pullbacks, Corrections and Trend Reversals
The big losses in the S&P 500 this week (the week ending 8/1/14) have the bears a-growlin’ - and rightfully so. Losses this week alone have wiped out all of the stock market’s gains for the year. The question is, as always, what’s going on? Is this merely a market pullback (no big deal)? Is it the beginning of a market correction (not good for your nerves, but healthy for strong uptrends)? Or is it the early stages of a major trend reversal (not good for our portfolio’s bottom line!)? Let’s have a look.
Measured from the most recent high in the S&P (1991 on July 24th):
> a normal market pullback could take us down as far as 1791
> a normal market correction could take us down as far as 1592
> anything below that would be considered “bear market territory,something us 401(k) investors avoid like a loud drunk at a backyard bonfire
Friday’s (8/1/14) close of 1925 represents a 3.3% drop from the high thus far, so it’s really too early to draw any conclusions on exactly what we’re in the midst of! Back in mid January of this year, the S&P dropped 6%; in late May of last year it dropped 7.5%; in mid September of 2012 it fell 8.8%! In each of these instances, the drop in prices never violated the existing major uptrend - but they sure scared the doo-doo out of investors!!
As trend followers, we don’t want to “get out” of a trend until there is confirmation - on our charts - that the trend is actually over. Waiting for that confirmation means that trend followers lose a little towards the end of a trend and miss a little at the beginning of one - and that’s the price we are willing to pay for that confirmation. We don’t want to be scared out of our stock funds by sharp pullbacks or corrections, then see the uptrend resume. On the other hand, we’re not about to ride a bear market down, either!
While “price” is our number one indicator when it comes to market direction, we look for other clues as well, especially when we see prices fall below the 50-day moving average (what we call our “Early Warning Sign”). Here are a couple of things we look at:
> volume: pullbacks and corrections on lighter volume are normal, healthy moves for strong uptrends; when higher than average volume accompanies these moves, it can be a sign of coming trouble (lots of people bailing out!)
> news related price reactions: when we get some good market news (as we did this week on earnings and jobs) during a pullback or a correction and stocks continue to fall, that can be a sign of coming trouble, too
Strong, consistent trends such as this one very often have violent pullbacks and corrections. This is also true during strong downtrends - stocks can rally hard for a few days or weeks, sucking in investors who believe the bear market is over, only to see the market reverse and resume its downtrend. Old Mr. Market is fickle like that…
Riding out pullbacks and corrections can be hard on our nerves. Riding out bear markets can be hard on our 401(k)’s bottom line! Knowing the difference is easy to see on our charts. The hard part is trusting those charts and acting accordingly - especially when those bears are a-growlin’!
For more information on our approach to handling these types of market conditions, click on our “Investing” tab, then go to the “Overall Market Direction” section. Hey, as long as you’re in that tab, you may want to also check out the “Investing and Your Emotions” section, too!
NEWS YOU CAN USE
"Who Routinely Trounces the Stock Market?"
from The New York Times
"Street Lingo: What Makes a Stock
"Small Cap" or "Large Cap"?
from Daily Finance
"An Investors Guide to Ticker Symbols"
from Indian Country
"Index Equity Funds Gaining Popularity"
from Investors Business Daily
"Men had Their Chance: New Funds Bet on Women"
from The Wall Street Journal
VIEWS YOU CAN USE
"Confessions of an Index Investor"
"3 Ways to be a Better Investor You Won't Learn in a Book"
from Daily Finance
"Who Are Your Investment Role Models?"
from The Wall Street Journal
"This Bull Market Could Last Another 15 Years"
from The Exchange
"The Indicator That Proves the Bull Market is Ending" from Yahoo! Finance
Summer Reading List
It's nice to while away the lazy, hazy days of summer with a good book or two - especially books that will help you become a smarter, more confident investor!
These selections may not turn any heads at the pool or the beach, but they'll sure make your bottom line take notice!
<<<<<<<< Clicking on these book images takes you to Amazon.com via our affiliate link. You won't pay a penny more for what you buy, but we do get a little moolah for sending you there - and that helps us cover the costs of keeping our website running free!
TAKE A BREAK!
('Cause nobody can read this boring investment crap all the time.)
Something fishy going on here:
This latest tasty addition to our Break Time column comes from the always awesome Amy Wisniewski at chow.com!
Grilled Blackened Catfish
with Creole Mustard Butter
Here are a couple of very simple retirement calculators courtesy of our friends over at Calculator Pro.
Here are the figures we used:
> Required Annual Income: we put in what we're making now (we don't buy into that "plan to spend 70% of your working income in retirement" idea!)
> Years until Retirement: we shot for age 65, but who really knows, right?
> Years after Retirement: we sure hope to have 20 good years of doing what we want to do!
> Annual Inflation: we used 3.5% (maybe go a tad higher to be safe?)
> Annual Return on Balance: we used 7% (maybe go a tad lower to be safe?)