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Jan 22

The Market Today 1/22/14: Correction

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I have discussed that the volatility in the markets would certainly increase going forward. That has certainly come to pass. As each day goes by, we see great volatility during the trading session. Is this trying to tell us something? Let’s dig a little deeper on this topic. Generally, after the market has been on a trend for an extended period of time, volatility increases. When the volatility increases, this signifies a change in trend is about to occur. Since the financial crisis began in 2008, the market has been on a strong uptrend. With volatility on the increase, this may be telling us that a correction is about to hit the market. Should we be scared? Should we be worried? Perhaps, but it is still too early to tell. Just because a correction may be about to begin, what kind of correction could happen? There are really only two types of corrections. First, the most painful on to everyone’s wallet, is the one of price. This is where prices of equities fall across the board, by more than 5%! The other type is the correction in time. From what it look’s right at this moment, this is the type we may be entering now. The market has stayed stagnant since the Christmas holiday. We have seen a few day’s in which it may look as if price is the way it wants to go. Then buyers come in to support the market. We are now entering the bulk of earnings reports. These reports may push the market into new high territory, establishing another leg to the bull run, or it may change the correction in time, to that of price.

Correction: Stocks

A correction in time gives investors time to reallocate, and invest in the markets strongest stocks, and sectors. As in 2013, we are seeing the high beta stocks lead the markets. High beta stocks means that, these stocks move faster than the overall market, both on the way up, and the way down. In other words, they are more volatile. Stocks such as Priceline.com, Google, Apple, Linkedin, and Netflix to name a few. They looked as if the were about to correct in the first two weeks of this month. That changed last week, and they are back with a vengeance. What the volatility is saying, is that the market is the market wants to sell off one minute, and move higher the next. The market is unsure as to what direction it wants to take. The levels you need to keep an eye on, are 1800 and 1850 on the S&P. Break’s of either end, will determine what direction the market will go.

Correction: Bonds

I wouldn’t go so far to say, as we are in the midst of a correction in terms of yield in the bond market. I would just say we are in a pull back. Yield’s have moved down from just over 3%, to just over 2.8%! Really, this should not come as a surprise. I have mentioned in previous commentaries that the bond market would trade in this range for the intermediate term. As each Fed meeting occurs during the month, we will get more clarification as far as what the Fed will do as far as tapering of the Quantitative Easing program. This will have great influence on rates as we get into the middle to end of this year. When it comes to the bond market, pay particular attention to the Fed meetings, and how much, or how little they taper, this will have the most affect on rates.

Author Sean Rhodes is an expert in financial markets and helping you manage your money. For a no-risk consultation, check out Sean at the following link for more information and expert advice on investing in equities and helping clients navigate a market correction!

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