Ending at 1934.96, the S&P 500 is -4.17% from its all-time high. About a week ago, the S&P hit a low of 1926.03, but closed above 1946 that day. It seemed as if the bulls had swooped in, buying the dip, and the market would continue its relentless upward trend. It seemed as if the inflated valuations would hold up, and the bulls would continue dancing in spite of the global news and pressures of the economy. Just when it seemed as if the markets would shoke off this dip with an influx of buyers, the S&P fell another 1.52%.
Stocks are still overvalued, but they are a bit cheaper. However, I think value investors who have been holding out could wait a little more, while those who have been consistently investing, with the strategy of using dollar cost averaging, could see this as a buying opportunity. Regardless of your outlook, one thing is certain. The markets are NOT in a correction, yet.
In the video above, a talking head by the name of Ben Willis of Princeton Securities Group, claims that we have already experienced a correction, the U.S. is the best dirty shirt in the hamper, and he's bullish because stocks are on sale. Now, I'm nowhere near a pro analyst. I'm wrong a lot more than I'm right, and I tend to think too highly of my own abilities when trying to look at economic and business developments. But one thing I can do is correctly define a correction and recognize a sale.
A correction is a 10% reversal, usually a decline, in an asset's price and occurs when the asset is overvalued. The purpose of a correction is to reduce the asset's inflated price back to the intrinsic value of the asset. The S&P hasn't even declined 5%, but Mr. Willis claims that we've had a correction, so BUY BUY BUY! I don't know what these "pros" are thinking. I also would rather wear a clean shirt if I can, or wait until the shirt is clean before I wear it.
In this video, Thomas Lee of Fundstrat takes it a step further in his prediction of the markets future. Now to be fair, the Russell 2000 has been in a correction, delining about 11% from it's altime high. But this in no way justifies that the S&P will increase 165 points, or 8%, in less than three months to 2100. First, the Russell 2000 has been absolutely erratic and has corrected twice this year. However, there hasn't been an actual correction in the S&P, and it would take a lot of BULL to move it 8% in three months. I guess I just don't see what these guys are seeing...
Now, for an investor in a low interest rate environment, the stock market seems like the only viable way to produce a return on capital, which to a certain extent is true. However, a decline in prices doesn't always constitute a good sale, and it doesn't mean we should just dive into the market. Stocks are still overvalued, so a decline in prices simply means that stocks are cheaper, but not cheap. The correction is still looming, and for the first time in over 5 years, appears as if it actually might happen. Value investors rejoice!
