Time Corrections

There are different kinds of corrections in the stock market. None of them are pleasant to endure. This particular pullback appears to be one of the least painful. It is called a time correction.

Markets need more time

Most investors are familiar with what I call the “gap down,” when markets drop 1-2-3% or more in a few days. We had a lot of those babies back in 2008-2009. Then there are the “slow bleed” sell-offs, where the markets drop a smaller amount but maintain a steady grind downward, punctuated by one or two feeble up days. So far this time correction, now in its second month, appears to be locked in a fairly tight trading range on the S& P 500, between 1,340 on the upside and 1,275 on the bottom.

A time correction can provide exactly the same outcome as its more dramatic (and debilitating) cousins. Remember why corrections occur in the first place. At a certain price level sellers believe the risk of holding stocks is too high given the perceived investment climate. There are several reasons that the bears want to sell: Libya, higher oil prices, the simultaneous fear of both inflation and slower growth, and stocks are extended and overbought. Sellers believe that the level of the S&P 500 is an attractive price in which to take some profits.

Then there are the buyers who believe the oil price will retreat as Middle East tensions dissipate over time. These bulls see the U.S. economy growing, unemployment falling and the Fed’s QE 2 continuing to provide support for the stock market. The bulls are looking for deals and are not willing to pay anymore than 1,300 or so for stocks as represented by the S& P Index level.

As new developments (negative or positive) come to the forefront, the buyers or sellers will react on any given day by pushing the averages up or down. What is important here is that over time (if the news remains the same) all the sellers who wish to sell will finally do so, leaving only buyers. At the same time the overextended, overbought condition of a great many stocks will have run its course leaving them in a condition to resume an uptrend.

Could stocks break through this range either up or down?

Of course they can and often do. In bull trends, such as the one we are in right now, it usually signals a selling climax. I don’t advise holding out for some climatic sell-off in order to buy this dip but rather accumulate equities as we trade closer to 1,300 and avoid chasing stocks on the upside unless some definitive solution to the Libyan problem suddenly materializes.

I personally believe that either Gaddafi will melt away, like the Wicked Witch of the East, or flee to Venezuela to his buddy Hugo, the Wizard of Venezuela. Oil prices will decline and the markets, now refreshed by this pause, will take you and me on a rapid and exhilarating ride higher.

In the meantime, patience would be a virtue that I would cultivate during these somewhat volatile times. If that doesn’t work, just stop eyeballing your portfolio every few hours and do something productive instead, like e-mailing me your investment questions.

4 Responses to Time Corrections


  1. John
    Mar 06, 2011

    bill i just recieved 685shares of chevron stock from my aunts estate what do you suggest i do with it


    • John
      Mar 06, 2011

      Dear John,
      That will depend on your time horizon. if you want a quick profit now is the time to take it while energy stocks are in vogue thanks to the high energy prices.
      However, over the long term, energy prices are going to go even higher and a world class stock like this will probably be much higher in price in the years to come. So short term overvalued, long term undervalued.


  2. David
    Mar 06, 2011

    Dear Mr. Schmick,
    I look forward to reading your column. You aren’t afraid
    of sticking your neck out and you have been probably as well in tune
    with the market over the last year or so as any of the talking heads on TV.
    I suspect that you are either a pretty decent chart reader or know some
    people who are.
    A few of my opinions for what they may be worth:
    1. I think we are having more of a rolling correction than a general one.
    Note the fairly serious pullbacks in FCX and F over the last few months.
    2. The market indeed is extremely efficient over time but extremely
    inefficient in the short run.
    3. I believe what separates smart investors is whether or not they have
    faith
    and confidence in this country or not. I may dislike a particular
    administration, and I might believe that this one has harmed the speed
    of recovery, but I still believe in our ability to adapt and to
    eventually overcome adversity.
    4. Although a balanced portfolio is generally good advice I do not now
    have one. I have a story line for the World’s economy and I base my
    investing on it. The world is beginning an era of massive expansion in
    consumption. The commodity story is not last year’s story or this year’s,
    but rather the next 30 or 40 years’.
    5. In oil the drillers and service providers look better than the integrated
    companies.
    6. Copper has almost no downside risk.
    7. If India can transform itself from an old-boy, corrupt society to one
    truly governed by law it would be a far better place to invest than China.
    8. If you don’t have your more affluent clients loaded up with MLPs
    then I believe you are doing them a disservice.
    9. These are my picks for buying today: ANR, CLF, F, FCX, IP, PBR,
    SWC, TTM, X
    10. These are stocks that are near peaking but would be great on a
    pullback: CSX, FLR, CAT, DE, SLB, JOYG
    You give out a lot of free advice I thought I would return the favor.

    Good Luck

    Keep up the good work,

    David
    Lenox


    • Bill
      Mar 06, 2011

      Dear David,
      Thanks for your analysis, your stock picks and your strategy. Our readers might agree or disagree with your choices but either way you are a man with a plan. All the best, Bill

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