The ASX All Ordinaries Index has rallied around 40% since hitting a low in March this year and so investors are starting to wonder if a market correction is on the way. The simple answer is yes, because the fact is there is always some form of stock market correction just around the corner.
Even in bull markets it is quite common for investors to take profits or sell stocks when they become nervous, so as I have mentioned before anyone can make an open ended call about a stock market correction and claim to be proved right when eventually the market dips.
Now as we enter September the correction clowns are out in force yet again. Prepare for an overdue correction they say, but rarely do they ever define by how much the market will correct or mention that historically bull market corrections are quickly reversed.
I am not saying anyone who predicts a correction is a clown, in fact I have a lot of respect for people who correctly spot corrections early and can gain from them. A correction clown in my view is someone who simply makes a prediction of a downturn that is so vague, that it is almost impossible for them not be correct given enough time.
I also have little time for people who use the term “correction” as a way to increase sales. If you have visited a few investment related websites then you have probably come across a statement something like this:
“The market is now overdue a for correction and investors will need to have the right tactics if they are to avoid losses and make the right trades”
Quite often a little further into the article there will be…drum roll…a link to just the newsletter you need to sign up for to help you profit from the next correction! It will only cost you $xxx but you will quickly make that money back in no time..so they say anyway. I wonder how many of these sites will compensate you if you lose money? None I guess.
Well since I am not selling anything please allow me to use a some charts to illustrate a few things about stock market corrections. Firstly if you have not done so before, may I suggest you read my earlier blog: Bull markets, bear markets and stock market rallies. This may help you understand my views on a few other frequently used (and misused) stock market terms.
Now let us look at a chart of the All Ordinaries Index over the last few years.
ASX All Ordinaries Index – Monthly Candlestick Chart over 5 Years
I am using a candlestick chart simply because it makes it easy to spot the months where the stock market fell. (i.e. the red marks) As you can plainly see even when the market is trending up there are months where stocks pull back, so calling a correction even in roaring bull market will pay off…just keep your prediction vague!
What this chart tells investors is that there is always a correction out there somewhere. Nobody knows exactly when it will strike or how far stocks will fall, but as sure as night follows day it will roll along.
Next let’s have a look at the S&P 500 Index from the U.S. stock market charted against the ASX All Ords Index.
ASX All Ords versus S&P 500 Weekly Closing Levels Chart over 5 Years
Apparently the month of September is not too good for the U.S. stock market and so it probably follows that our market also will struggle around that time as well.
Being a long term investor I tend to ride out corrections and use them to top up holdings rather than sell anything, but since there seems to be so much talk about a major market correction coming along I thought I would have a quick look at the S&P for the last few years to see if I should be worried.
On that chart above I have marked the corrections that have taken place over the last few years in or around September. What is pretty clear to see is that around that time there often tends to be some type of market correction on the S&P 500 and this usually causes the Australian stock market to drop also.
Since ASX stocks have rallied around 40% so far I personally would not be surprised to see nervous investors selling in September, but for me that would be a sign to look for bargains if any popped up. I am not expecting anything more at this stage than a monthly fall of around 5% and I would be a happy camper of course if the market finished higher.
Finally let me be clear and say that I have the utmost respect for stock traders who use analysis to try and spot trends including corrections. If they can spot when a correction is coming and make money then good luck to them I say.
However I don’t have much time for people who make repeated vague predictions regarding stock market falls and then expect adulation when finally a correction comes along, especially when they are trying to sell something!