Wednesday, April 11, 2012

Probability of Market Correction is High

The much anticipated correction appears to have started.  I don't believe the recent decline will be another false start.  There are too many factors pointing towards a correction.   Here are the elements that are supporting a correction:
  • Earnings growth slowing.  Estimates for 2012 Q1 earnings have been revised downward already, reflecting the slowing of earnings growth and economic growth.  I expect a high proportion of earnings to disappoint.

  • EU debt issues.  The sovereign debt issues of the Euro zone won't disappear from the debt restructuring that has been or will be done.  Eventually, the Euro zone will have to own up to the solving the debt issues for Greece, Portugal, Spain and Italy and maintaining the Euro monetary union to be mutually exclusive options.

  • Technical market conditions.  Since October 2011, there hasn't been a weekly pullback of even 1%.  In addition, the market has been rising on low trading volumes.
  • Today, I plan to start selling the positions we hold in our investment and retirement savings accounts, especially if I have purchased the stock since October 2011.   After a 20% decline, I plan invest 10% of our retirement account back into stocks. will reinvest 15% for the next 10% drop.  Then I will reinvest 20% for each succeeding 10% drop.  So if the market drops 40%, we will be 45% back into the market.  Past 40%, I probably don't have the courage to continue to reinvest.

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    This is not financial or investment advice. Please consult a professional advisor.

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