4 Reasons a Stock Market Correction Is Right Around the Corner
If you are like most traders and investors, you find an approach that works and stick with it. That's smart. Until it's not.
Through my years of trading I've learned that a critical element to success is flexibility and a willingness to adapt to changing market conditions.
That means a strategy that worked well last month or last year, may not work next month or next year.
Why? Individual markets are like living breathing animals. Each has its own pulse and rhythm and that can change over time. Sometimes a market can go into hibernation, like a bear taking a long winter nap - trading volume declines and daily price ranges narrow. Other times, volatility picks up significantly creating large range trading days, a high volume environment and lots of opportunity for intraday scalpers.
The Stock Bull Is Old and Tired
The current bull market in U.S. stocks is old and overdue for a correction. Stocks have been climbing in a bull cycle since March 2009. Corrections, and even bear markets are a normal part of the stock market.
Since WWII, there have been:
- 56 pullbacks (5-10% decline)
- 21 corrections (10-20% decline)
- 12 bear markets (20%+ decline)
- Source: CFRA
Since the turn of the century, investors lived through two 50% declines in the stock market: 2000-2002 and then again in 2007-2009.
It's Time for a New Strategy
Traders using a "buy the dip" strategy in recent years have been paid handsomely. Warning: we are entering a dangerous market phase for traders and investors who don't prepare. As market tops unfold, volatility picks up. As a bull cycle rolls over into a pullback, correction or even bear market phase that shift is generally not evident to traders right away.
Traders who continue to buy the dips will get an unpleasant surprise.
A string of losing trades. Once the tide turns, the "buy the dip" strategy turns into a losing approach.
The Clock Is Ticking On a Correction
During a bull market cycle, stocks historically have seen a 10% correction every 515 days. Guess what? We are over 2 months past that the average.
Here's 4 reasons that a stock market correction could be right around the corner:
- Historically, since 1950 - September is the worst performing month of the year.
- A debt ceiling debacle is brewing in the U.S. Congress, with default looming overhead.
- To date, Congress has failed to deliver the economic stimulating policy measures promised (infrastructure spending bill, massive tax cut legislation). The stock market already priced in that good news in the rally following the November U.S. presidential election. If Congress fails to deliver stocks must price out those expectations which have already been built in.
- Geopolitical tensions remain high, with North Korea at the forefront of rising tensions.
When it comes to old and tired bull markets, it doesn't take much of an "excuse" to send a market spiraling lower. There's plenty of potential fodder that could trigger a downturn in stocks.
The question is – will you be ready when the cycle turns?
Successful traders learn, test new methods and adapt to changing market conditions.
If you've been having success trading, congratulations! That is no easy feat. If you've seen challenges in your trading and investing, you aren't alone.
Expand Your Trading Toolbox Now
No matter your skill level or knowledge base, all traders and investors can benefit from expanding their trading toolbox and learning new approaches. Check out my free option trading lesson videos here or listen to my free podcast: How To Develop A New Options Trading Strategy.
A stock market correction or even bear market is inevitable. History shows that. The question is will you be ready to adjust your trading strategy when that happens?
Got questions? I'm happy to help. Email me here. Let's trade together!
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