Market Corrections Are Not Unusual

Did not have time to post today because of work commitments and am down with a little flu. But I read this article and thought it would be good to share with all of you. So enjoy. Will try to post something this week.

Market Corrections are not unusual.

A bull market is defined as one that achieves a return greater than 20%, conversely a bear market is one that declines over 20%. Market corrections are ones where the decline is greater than 10%, but does not exceed 20%. The market's recent decline from its April high was -12.3%, thus qualifying it as a correction. Corrections do not necessarily lead to bear markets though.



It’s been about 14 months since the current bull market began on March 9, 2009, which is in the neighborhood of the average length of time that has passed from the start of prior bull markets to a first correction (17 months, see above table, click on it to see the full table).

The stock market gained 80% before the recent correction. Historically, the first correction in a new bull market has come after average gains of 57%, implying the current bull market was overdue for a correction on a price appreciation basis.

The main factor that has differentiated this recent correction is that it has taken place at a fairly swift pace compared to history. It took 27 days for the market to surpass the 10% decline threshold, which is half the time it’s historically taken on average for a correction to occur (54 days).

Since 1926, there have been 20 stock market corrections during bull markets, meaning 20 times the market declined 10% but did not subsequently fall into bear market territory. Whether the market recovers again from here and avoids a bear market remains to be seen, but at the very least the more surprising development based on historical patterns would have been a continued bull market rally without a 10% pause.

In the short term, the S&P 500 index has bounced 2% off the May 26 low of 1,067. A number of equities are now trading at attractive valuations; maybe giving investors an opportunity to pick up some decent companies at attractive prices/valuations.

Source: Fidelity Investments Research.

It is something to keep our spirits positive. Haha.

Best,

SVI

The market today is like a pitch dark room. Do you dare to move forward?

First and foremost, I would like to state that I am writing this post while I am half drunk in a foreign country and my readers may not understand how this will link to investing principles. I just felt that I should write this post down as a way to remind myself about what I have learnt today and to never forget the important lesson which I attended today.

Today, I attended a session called "dialogue in the dark" in the wonderful and interesting country called Hong Kong. I have to admit that I was really skeptical about the whole activity because I thought to myself, what the hell can one learn about going into a pitch dark room and doing team activities in the dark. But I feel compelled to share the lesson which I learnt during the session with all of you. We spent the better part of 3 hours in a pitch dark room led by a guide who tried to lead us through the journey of sensory awakening. It was an interesting experience to go through darkness to try to enhance your senses and try to do group activities at the same time.

Why am I sharing it with all of you? Its because I feel its exactly what we are going through in this month's market. Fact of the matter is, none of us know for sure why the market is falling at this rate and why the sudden upshot of volatility. The volatility index on the CBOE is the VIX and it has not been this high since March 2009. Imagine yourself walking in a big open space with nothing but a blind man's walking stick in a place so dark that you cannot see your hand in front of you. It is exactly the same situation as you are in now with regards the market.

It is true! No matter how smart you are, it means nothing because there is no damn way you will know how the market is going to go. Not even the smartest people in the world can be sure. On last Thurday, the Dow Jones fell by 370 odd points, but do you know what was the real reason? Was there anything that happened that could have caused such a steep fall? Hell no! That is why I am likening what is happening now to what I experienced today in the dark room. You do not know what is going to happen to the market over the next few months. It could rebound quickly, or it could continue falling.

If you were the only one in the dark room, there are lots of reasons to why you should fear. Some people would freeze on the spot and not move, they will end up being safe but will never get anywhere because they are not moving, the thing is, they will never be out of the dark being cowardly. Or they could use the stick and try to feel for the way forward and be brave about it. The best way to describe the situation today is to acknowledge that no one in the world knows what is the main reason. Thus its the same as having the whole world being stuck in a place that is pitch dark and not knowing where they are and what awaits in front of them.

If you do not continue to walk forward, there is a chance that you would miss a big chance and end up with nothing, if you do walk forward, two things may happen. You may get fall, hit something but eventually you will find a way into the light. What I am trying to convey here is, fortune favors the brave.

Oh on a final closing note, did I mention that the guides that led us through the pitch dark room are blind? Amazing? It was. Why did I point that out? Because the analysts of this world are the blind guides. So they are no better than you but they dare to put their feet forward and try moving. Some of them may be right, some may be wrong. But their guess is as good as yours, so why don't you do your own work and make decisions on your own. I am doing just that. Are you?

Best,

SVI