Ready for a Stock Market Correction?

According to CNN Money the stock market has lost nearly all of its gains for 2014. Are you ready for a stock market correction? Is it time to sell your stocks or already too late? How much farther might the market fall in this stock market scare?

The Dow plunged as much as 370 points Wednesday morning before pulling back a bit, although a 150 point loss isn’t anything to cheer. There wasn’t an obvious trigger. Ebola and Europe’s sour economy are clearly worrying. Earnings have been so-so, and retail sales data out this morning was disappointing.

October has been a brutal month, erasing most of the 2014 stock market gains. The Dow is negative for the year, and CNNMoney’s Fear & Greed Index is showing extreme fear.

The question to be asked is whether this is the dreaded correction or if there is more to come. If the correction has just happened it is time to buy. If there is more to come you may want to sell across the board.

What Constitutes a Stock Market Correction?

According to Investopedia a correction is fall of ten percent or more in the value of a stock or the market in general.

A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either.

Strictly speaking the market has not yet fallen ten percent but as noted in the Forbes article we quote next, the market has moved from confident to worried and that could spell more trouble for stocks.

Why Are We Seeing the Correction Now?

According to an article in Forbes the correction’s first step is complete. This step, according to Forbes, is when the market goes from confident to uncertain.

On October 1, the stock market was already off its highs and was contending with signs of weakening growth (e.g., “Housing, Consumer Numbers Down”” and “Oil Tanks as Supply Overwhelms Demand” in the same newspaper). However, bull market thinking was still the prevailing view, and the positive October 3 employment report reaffirmed it. Then the news turned predominately negative this past week. On Tuesday, Germany’ poor growth report heightened global growth worries, and helped the U.S. stock market fall sharply. Wednesday offered a seeming reprieve after the Fed released its 3-week old minutes late in the day. Then, having second thoughts, the market more than reversed itself on Thursday. Friday, the market piled it on with an unusual late day selloff in the already negative week.

We talked about this in our articles Sell Stocks before the Bubble Bursts and Signs of a Market Correction. Once you are decided that the market has fallen as far as it is going to fall it will be time to consider buying before the next market resurgence. Timing is critical however as the market may not have yet regained confidence in the values of stocks across the board. As always do your own homework and check out any tips before buying back in to the market.

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