Even as a Correction Looms, Investors Aren’t Getting Scared
While most investment advisors are expecting a fairly substantial stock correction in the coming weeks, few are particularly frightened about the prospect.
In fact, the prevailing sentiment among market pros is that investors should be holding steady in their positions or even adding in certain areas, as Wall Street braces for a correction unlikely in most views to exceed 10 percent.
"Rarely do markets go in an absolute straight line, so a correction certainly wouldn't be a surprise to me," says Don Humphreys, president of Voyager Wealth Management in Harrington Park, NJ.
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"But I tend to be more longer-term, and I'm not a proponent of market timing, trying to get in and out, things like that. If the returns of March and April taught us anything, that can be a dangerous position. I am not specifically doing anything in terms of broad-based changes to my overall investment process."
The market has signaled a correction at various points during the massive rally of the past five months, but has always rebounded. A correction is generally defined as a 10 percent move lower.
On Monday, correction talk escalated as Asian markets weakened. But stocks have held strong the past two days, gaining nearly 1 percent Tuesday and then adding to those gains Wednesday despite a major 5 percent swoon in the Chinese stock market.
"It's usually the other way around—everybody expects a rally so much that it never happens," says Uri Landesman, head of global growth strategies at ING Investment Management in New York. "Everybody is looking for a correction. The question is, is it expected so much that it gets totally faded?"
The next few days should tell the story of whether a correction is coming, says Landesman, who believes that a test of 970 on the Standard & Poor's 500 (Market Data Express: .SPX) will be crucial.
Yet as that point looms, he says he's adding positions, particularly in large-cap health care companies, while also seeing energy and materials being particularly strong.
Even a failed test at 970 probably would only send the broad-based gauge down to 900, says Landesman, who is holding to his 1,135 S&P forecast for the year.
In the shorter term, though, some experts think investors should be trimming positions until the market stabilizes.
Market fear, as measured by the Chicago Board Options Exchange's Volatility Index (Market Data Express: VIX), has been on the upswing lately as more signs appear that the economy is still shaky, and as corporate earnings continue to beat on the bottom line of profit but miss on the top line of revenue.
Similarly, fixed income prices are likely to be choppy as the market struggles to find its next move.
"It's a tremendous setting for an asset price deflation," Robert Tipp, chief investment strategist for Prudential Fixed Income Management, said at a panel discussion the firm sponsored Tuesday on the economy and financial markets. "The swings are going to continue to be very volatile."
With the ramped-up market seemingly ready to take a breather, then, this could be a good time to book profits and wait for another entry point.
"You've got to switch sides," says Dave Rovelli, managing director of US equity trading for Cancaccord Adams. "We had a tremendous move in the worst environment since the Great Depression. You should be happy to take profits."
At a price-to-earnings ratio of 24 in real terms, the S&P 500 is overbought, Rovelli says. Should total S&P earnings hit the low $70 range, as projected, "that puts us at only 5 percent upside for the rest of the year," he says.
Rovelli recommends investors trim at least half their positions as the S&P moves to a retest of 950. Investors can look to get back in again should the index hit the 900 range, he says.
Despite the likelihood of a move lower—the market, after all, can't be expected to hold a 50 percent five-month gain without some recoil—many investors are nonetheless looking for reasons to hold tight. Wednesday's drop in fuel stocks, indicative of an increase in consumption and therefore economic activity, was enough excuse for the bulls to get back in the game.
"Unless you're convinced that this rally was entirely an illusion, then you have to look for opportunities to get in," says Michael Kresh, president of M.D. Kresh Financial Services in Islandia, N.Y. "Getting in the middle of a long-term rally is a hell of a lot better than not getting in at all."
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