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Correction Only Just Beginning

June 27, 2013
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By: Craig Allen

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With the stock market and bond market bounce of the past few sessions, some investors apparently believe the recent 7.5% correction in the S&P 500 and 6% correction in the Dow were “the correction,” and now the market is free to advance to higher highs. Unfortunately I believe the correction has only just begun.  We have earned back about half of the correction to-date, or about 3% to 4% for the S&P 500.  This is a very typical technical bounce for any initial move of a correction phase.  If stocks cannot continue to advance higher from here, we should see another, more significant leg down for stocks, taking us down at least 10% from the recent highs (1,687 for the S&P 500).  At-present, we are up about 13.5% year-to-date for the S&P 500, and are up about 20% from the November 2012 low.  This was a very substantial move in a relatively short time-span.  Given that aggressive move, the current very expensive valuations for stocks, persistently high unemployment, the pending tapering of the Fed’s bond buying program, second quarter earnings reports that will commence shortly and which should be disappointing given the weakness in consumer spending, and rising interest rates, I believe we need to have at least a 15% to 20% overall correction to bring stocks down far enough to support a healthy further advance to new, all-time highs later in 2013 and into 2014.