A market correction is a pullback that is based on the percentage that the market sells off. Analysts generally consider a sell-off of less than 10% a market correction, while a sell-off of more than 10% would constitute a market crash. While the difference is negligible, a market correction is more orderly, whereas a crash is more severe and indicates a structural break of the market trend. Pullbacks are expected in any economy, and many investors view a market correction as positive, allowing them better prices on which to enter new positions.
I hope you didn’t get caught off guard this past Monday with the broad market sell-off.
If you did, you need to really think about risk management and having a good investment strategy in place so that you can avoid or minimize the impact of a market correction.
And if you think that stocks will rally, don’t be so sure, because the current market climate is tricky and remains highly vulnerable to another correction, which, of course, could be much bigger.
You need to get rid of that invincibility feeling that’s probably stuck with you during the recent rally.
Success in trading and investing has nothing to do with bravery. Taking a risk to make big gains makes sense and has its place, but after the advance we had, you also need to be prudent and hedge your gains against the highly likely and bigger correction that’s still to come.
You need to have a viable investment strategy.
Taking some profits off the table makes sense, but you also need to protect your outstanding positions.
The sell-off on Monday indicates how nervous the market is, and don’t let anyone tell you otherwise.
So it’s an opportune time to remind you that you all need to hedge just like professional money managers.
My favorite investment strategy to protect gains is the use of put options as a defensive hedge against market weakness, or something that is called a protective put, or put hedge.
There is no special knowledge required. And it’s quite simple and easy to execute.
Think of this strategy as akin to buying insurance on your home, car, life, … Read More
Over the past few months, the strong performance by the broader market, best represented by the S&P 500, has been far better than most analysts and investors had expected.
Considering the political situation in America, especially with the fiscal cliff talks, and the questions surrounding earnings, the S&P 500 has risen to levels not seen in years.
However, there are some indications that perhaps a market correction in the S&P 500 is likely. One indicator is to use insider selling information to gauge how corporate executives view their companies.
For the week ended February 1, 2013, the Vickers Weekly Insider Report, produced by Argus Research, reported that the insider sales ratio was nine to one for stocks on the New York Stock Exchange (NYSE). This means that for every one share bought by insiders, they sold nine shares. (Source: Hulbert, M., “Insiders now aggressively bearish,” MarketWatch, February 6, 2013.)
This is an extremely high level of insider selling. The last time the ratio was this high was in the summer of 2011, just prior to a market correction in the S&P 500.
Note that this does not guarantee that a market correction in the S&P 500 will occur. There have been many times in the past when insider-selling pressure was high and the market continued moving higher. However, based on information gathered by Argus Research, when the insider selling ratio gets to this point, the Wilshire 5000 index experiences a market correction of 2.1% over the next month.
While many analysts had expected a disappointing earnings season to cause a market correction in the S&P 500, so far, companies have … Read More
The S&P 500 topped 1,400 on Tuesday for the first time since May 3. The upward move was also the fourth top above 1,400 since 2008. In January, my stock analysis estimated the S&P 500 could test 1,400 this year, so the upward move has come a bit early.
Some in the media are even whispering about 1,500, but the last time the index was at this level was in October 2007 at the historical high.
The word “overextended” comes to mind at this juncture, based on my stock analysis. The fact is that since the amazing climb of the S&P 500 from 1995 to 2000, the index peaked on two separate occasions in 2000 and 2007, at above 1,400 and 1,500. And my stock analysis is looking at whether the current run-up from 2009 is sustainable and whether the index is heading for its third peak since 2000. You cannot tell at this moment, but, as the S&P 500 edges towards 1,561 (last achieved on October 8, 2007), it should become clearer, based on my stock analysis.
That high point may be tested in 2013 if the S&P 500 can rally another 11.5% from the 1,400 level. Again, it will be interesting to see if the index can break higher to a record high.
I’m not even convinced 1,400 will hold by the year-end, based on my stock analysis.
Following the break at 1,400 in March, the S&P 500 retrenched and failed to hold on two subsequent attempts at 1,400 in late April and early May.
The reality is the market is betting on a resolution and calm returning … Read More