The markets, along with exchange traded funds (ETFs), have seen a dramatic uptrend since the March 9 low. So much so that rumors of a correction refuse to completely go away. But is it really going to happen?
The U.S. stock market is poised for another double-digit advance, but many analysts think recent trends are signaling a major market correction, writes Kate Gibson for MarketWatch. David Kelly, Chief Market Strategist at J.P. Morgan Funds, points to back-to-back negatives for equities and disappointing reports on durable goods and home sales as indicators for a possible beginnings of a correction.
Trends show that financials and more economically sensitive sectors are being dumped for more defensive sectors, revealing movement from outperforming to underperforming areas, says Paul Nolte, director of investments at Hindsdale Associates.
Don’t forget: in 2003, we witnessed a similar situation. The market began to recover, and many held firm to the belief that a correction was around the corner. This correction never materialized, and the markets continued more or less on an uptrend until the recession started in 2007.
Is the market a “coiled spring” or an opportunity you could be missing? Since the market low, a number of ETFs have surged 70%, 100% or even nearly 150%.
Whatever you think could ultimately happen, to sit out and ignore the current rally is to miss a chance for gains, as well as a chance to make up what was lost in your portfolio. Investors hiding in the safety of money market funds aren’t making anything from those minuscule yields. But have a strategy when you enter, and stick to it. If a correction does come to pass, a stop-loss will help protect you on the downside.
The markets have been steadily improving for much of this year, and all signs say that while the recovery may be a long, slow one, it will still be a recovery. Why?
- There’s $4 trillion on the sidelines, and as that money trickles back in, the rally should continue
- Earnings season is just around the corner, and while many corporate forecasts are on the cautious side, their actual numbers could be better than expected
- Federal Reserve Chairman Ben Bernanke has said the recession is “very likely over,” and the Federal Reserve is also keeping interest rates at record lows for now in order to continue the pace of the recovery
Deeply-held beliefs about the basics of stock and bond markets have been shattered, leaving many on a quest for explanation, remarks Roben Farzed for BusinessWeek. One such belief was that stocks would perform better than bonds over long term.
One group claims that markets are on the verge of a “new normal” in which old investing rules will give way to new ones during a long period of slow growth. Another group believes that abnormalities will soon turn back into historic patterns.
“Old normalists,” or people who believe in a return to historic patterns, think that stock and bond returns will revert to a normal state, with risk appropriately rewarded with higher returns. Many money managers, however, are have a difficult time in relating old patterns to the current ones. Many have just given up and drawn up an entirely new model.
Small-caps historically tend to perform well in a recovery, so keep an eye on them as the markets move higher:
- Vanguard Small Cap Value ETF (NYSEArca: VBR): up 27.8% year-to-date
- PowerShares Dynamic Small Cap (NYSEArca: PJM): up 10.7% year-to-date
- SPDR Dow Jones Small Cap Value (NYSEArca: DSV): up 32% year-to-date
For more information on trend following, visit our trend following category. You can read more about investment strategy in The ETF Trend Following Playbook.
Max Chen contributed to this article.