Weekend Economists Examine (E)sc(h)atology January 24-26, 2014

[Demeter]

19. Why a stock market correction should make you happy

http://www.marketwatch.com/story/why-a-stock-market-correction-should-make-you-happy-2014-01-24?siteid=YAHOOB

“Excesses in one direction will lead to an opposite excess in the other direction.”

So says rule No. 2 from retired and respected market technician Bob Farrell, whose 10 “Market Rules to Remember” offer investors a reality check on stocks, bonds and their money. Farrell’s advice is especially timely after the disappointing week stock investors have had, with the S&P 500 SPX -2.09% suffering its worst one-week percentage decline since June 2012, and the Dow Jones Industrials DJIA -1.97% taking its worst beating since November 2011. So far this year the S&P 500 has lost 3.1% and the Dow is down 4.2%. Where she stops, nobody knows. But the conviction that stocks are due for a correction – meaning at least a 10% slide – is the worst-kept secret on Wall Street. Pundits have been opining for months about how stocks are overbought and investors are too optimistic.

It’s about time stock prices turned south. Even a year without a meaningful correction is too long a stretch. Investors get comfortable; the market’s proverbial wall of worry breaks down. A correction gives investors who want to get out of the market an excuse to exit, and sets the stage for buyers to come off the sidelines. A selloff early in the year is even more welcome, since it gives the market a chance to form a new base from which to move higher.

Lower stock prices remind us that Mr. Market is mortal. “There are no new eras – excesses are never permanent,” Farrell noted in another of his famous rules. Indeed, if your investment portfolio is diversified to your specifications, market stumbles can be opportunities.

The dust from this market storm will settle, as it always does. Meantime, give your portfolio a checkup and figure out how to move forward. What’s different about the longer-term prospects for the global economy and the market that we didn’t see two weeks ago, when buyers were still lined up? Likely, not much.