The Constant Correction Call
- Joshua M Brown
- February 4th, 2013
There is always a correction coming. Always always always.
In bull markets, corrections are to the downside when too much enthusiasm is baked in too quickly or an outlier event (terrorism, natural disaster, etc) rattles everyone's confidence in the short-term.
In bear markets, corrections are to the upside when widespread negativity gets ahead of how bad the underlying fundamentals actually are or there is a brief moment of hope that the worst is over.
Turning points that are more than corrections, that are true trend-changes (tops in bull markets or bottoms in bear markets), occur when everyone is on one side of the market and the optimistic or pessimistic narrative is so well-understood that it seems unshakeable. It becomes an article of faith among market participants that present conditions will persist.
Present conditions never do persist and only change is constant.
Determining whether or not a correction is actually one of these trend-changing points in time can only be done in hindsight. I know of no trader, investor, blogger, journalist, professor, TV anchor, system, formula, strategy, firm, octopus, researcher, algorithm, machine or mechanism by which anyone can do this in real-time consistently.
The best investors don't even bother trying. The biggest wannabes are consumed with the ongoing attempt and desperate for you to watch them do it. "I'm bullish! Now I'm bearish! Now I'm bullish again! Look at me! Follow me!"
Those who constantly shout about imminent corrections are occasionally rewarded by the fact that corrections can and will happen on both sides of the market.
Can you make it again? On time? Can you make it every time? Can you remind us of how many corrections you've predicted that did not occur?
Can you nail every 5 to 7 percent upside and downside correction in the market on a continuous basis?
You are to be congratulated if so.
But it is more likely that you cannot.
The constant correction call is noisy in bull markets, dangerous in bear markets and of little value to the majority of people in either case.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.