5 Things To Ponder: Buy The Dip Or Market Correction

by Lance Roberts of STA Wealth Management,

Obviously, this weekend's reading list is focused on what to do now.  Is this just another "dip" that investors should buy into? OR, is this the beginning of the long overdue intermediate term correction or a "mean reverting" process?

I addressed the issue of potential support levels for the current correction in the post earlier this week. The problem is always identifying the "turn" in the markets from a bullish uptrend in advance. This issue is why most individuals, despite the best of intentions, generally wind up "selling bottoms" at the point of maximum pain.

With this in mind, I have cultivated a point-counterpoint set of views on the market. What we need to "ponder" over the weekend is discerning whether the current risk/reward ratio still justifies being long equities at the current time. Is this the time to "sell high," or is this just another "head fake" that will lead to further all-time market highs?

1) Bears Emerge, Is It Time To Buy? by Jeff Cox via CNBC

"Respondents to the weekly American Association of Individual Investors survey indicated their strongest levels of pessimism in almost a year. Bears outflanked bulls 38.2 percent to 30.9 percent. The level of negative market views was last eclipsed for the week of Aug. 22, 2013.

 

Of course, sentiment surveys generally are of most use as contrarian indicators—so when sentiment gets too heated to one side, it's best to move the other way"

Read Also: Pull Back Or Bigger Bear Market by Adam Shell via USA Today

2) The Tocalino Index by Sebastiao Tocalino

"The point that stands out recently is the noticeable gap between the rapid rise of the Dow Jones index and the lagging behavior of my own indicator from 2009 onward. Even if I take into account all the seemingly endless stimuli from the restless Federal Reserve, in my opinion the stock market still seems to be feeding more on some sort of paranoia, or complacency from lack of other investment alternatives, than any demographic, business and economic fundamentals could ever support."

Read Also:  Calm Before The Storm by Scott Granis

3) 3 Reasons The Sell-Off Isn't Finished Yet by Anthony Mirhaydari via MSN Money

"But the kicker has been indications that the Federal Reserve could raise interest rates in the early part of 2015 given the bounce back in the economy, ongoing strength in the jobs market and the newfound confidence by the more hawkish members of the Fed's Open Market Committee.

 

This is an issue that's not going away as folks are forced to prepare for the first increase in the cost of money in eight years."

Read Also: Is It Time To Panic? by Ryan Detrick

4) Dow Theory Suggests Markets Will Still Rise by Mark Hulbert via MarketWatch

"The Dow Theory, for you history buffs, was introduced gradually over the first three decades of the 20th century in editorials in the Wall Street Journal by its then editor, William Peter Hamilton. The three preconditions for a sell signal that he set out are:

 

• Step #1: Both the Dow Jones Industrial Average and the Dow Jones Transportation Average must undergo a “significant” correction from joint new highs.

• Step #2: In their subsequent “significant” rally attempt following that correction, either one or both of these Dow averages must fail to rise above their pre-correction highs.

• Step #3: Both averages must then drop below their respective correction lows

 

To be sure, though these steps might appear to be clear enough, they still leave room for interpretation. Among the three Dow Theorists I follow, for example, there is disagreement about whether step #1 has even been satisfied by recent market action."

Read Also:  How You Will Know If It's Time For A Market Crash by L.A. Little via MarketWatch

5) You Have Been Warned by John Hussman via Hussman Funds

"The worst market return/risk profiles we estimate are associated with an early deterioration in market internals following severely overvalued, overbought, overbullish conditions. This is what we observe at present. In contrast, the strongest market return/risk profiles we estimate are associated with a material retreat in valuations coupled with early improvement in market internals. I have every expectation that we will observe this combination over the completion of the present market cycle. So I expect that, perhaps to the surprise of many who don’t understand this approach, we will be quite bullish and aggressively invested as market conditions shift over the completion of the present market cycle. But now is emphatically not that time."

 

 Read Also: Don't Buy This Dip, The Fed Ain't Your Friend by David Stockman