The Inevitable 10% Correction

[tuixiu]

We went back under a nice milestone we achieved during the summer, that is great news since when we achieve it again another night of cocktails to celebrate.

 

[eta2020]

S&P not quite 10%(1817) but close enough for me. Been waiting for this over 6mo

What did you wait for?

It is still higher than it was 6 months ago plus missing dividend. We need to go below 1800.

And we may or may not.

 

[2B]

What did you wait for?

It is still higher than it was 6 months ago plus missing dividend. We need to below 1800.

And we may or may not.

+1

I think we're about where the S&P was in April but I didn't verify this. I'm still up for the year a little bit.

 

[explanade]

A possibility. The question mark for me is how long the Saudis can withstand lower prices before it starts to undermine their ability to keep their oppressed population sweet with lots of domestic spending. I have a funny feeling that within 6 months we will see oil prices back over $90/bbl. If ISIS gets completely out of hand, the Saudi border is pretty close to where they are now. Oil prices could become sensitized to political events again.

In the meantime, lower oil prices are a stimulant to the US economy and poison to Putin's ambitions. If he thought the sanctions would not matter, taking away the oil earnings that Russia was counting on will put paid to that.

CNBC said the Saudis may be willing to let prices fall or stay low to hurt other producers. For instance, Venezuela badly needs higher prices while Saudis have wells that cost as little as $5-10 per barrel of oil.

OHTH, oil sands in Canada may cost more like $100 per barrel of oil while the Bakken may be more in the range of $50-80 per barrel.

 

[Lsbcal]

A 10% or more correction can happen at any time for no reason at all, other than it was maybe "due" or whatever. A 20% sell off is not a correction, but a bear market and usually doesn't happen unless there is an economic contraction/recession. You are best off setting up an averaging in program to reach your desired AA.

Audrey, you are a sharp cookie!

After you mentioned something back in a post a few months ago I researched how bad corrections have been. Particularly I was looking for corrections (or bear markets) that were not Fed yield curve related i.e. the yield curve was reasonably sloped as it is now. Three corrections stand out since the 1950's that did not result in a US recession:

1962 down -26%
Reason: Don't really understand this one but a young Warren Buffet gives his explanation in this 2 minute video:

1998 down -16%
Reason: Asian financial crisis, Russia devalues ruble and defaults, LTCM goes bust

2011 down -17%
Reason: European debt crisis

Finally, I looked at drawdowns over a 200 day back looking window. This chart shows them from 1951 with the SP500 on the (logarithmic) right scale and the declines on the left scale. You can see the 1962, 1998, and 2011 declines.

I don't think this comes as a surprise to anyone here but it's interesting history to me. I have to keep holding my emotions in check.

 

[haha]

It is still higher than it was 6 months ago plus missing dividend. We need to go below 1800.

And we may or may not.

Some time ago I read a great book premised on the idea that pronouns are the window onto someone's unconscious framing. For example, who is this "we" used by the above poster and many other posters, pundits, writers, etc?

It is almost as if the S&P or some other index is given humanity, or at least agency. I wonder if this is an aid to optimal decision making?

Ha

 

[brewer12345]

CNBC said the Saudis may be willing to let prices fall or stay low to hurt other producers. For instance, Venezuela badly needs higher prices while Saudis have wells that cost as little as $5-10 per barrel of oil.

OHTH, oil sands in Canada may cost more like $100 per barrel of oil while the Bakken may be more in the range of $50-80 per barrel.

What I was hinting at is there is effectively a huge embedded cost to oil production in Saudi in the form of necessary high social spending to keep the populace quiet. Over the medium to long term, if the Saudis do not make enough from oil earnings they are in deep trouble because they will not be able to nip unrest in the bud by basically bribe the populace.

 

[mrfeh]

I am [-]stubbornly[/-] sticking to my plan of rebalancing only once a year.

Good for you!

I'm somewhat shocked at all the market timers.

 

[Brat]

What I was hinting at is there is effectively a huge embedded cost to oil production in Saudi in the form of necessary high social spending to keep the populace quiet. Over the medium to long term, if the Saudis do not make enough from oil earnings they are in deep trouble because they will not be able to nip unrest in the bud by basically bribe the populace.

The Saudis have been worrying about that for some time but I suspect that they were concerned about exhausting their oil reserves and having little baksheesh to offer.

The external fighting between the various Muslim sects as they wage war against others within and without their faith is a huge danger to their core business and the stability of the monarchy.

 

[project2501]

What did you wait for?

It is still higher than it was 6 months ago plus missing dividend. We need to go below 1800.

And we may or may not.

Could obviously tell the correction had to happen soon enough. Took longer than I expected. Could be bad data and ebola scares, at this point don't care just glad it happened. I've been holding fast since last years re-balance waiting for the correction of at least 10% before making more moves. Just shifted a few things around before close today and already looking better to be ahead if levels go back up.
Sure it's timing, and looked at as a no no. I'm the type that can't just sit on the sidelines when I see buying opportunities this good. The what if's.
Guess I like some additional risk when things look dull just plotting typical advancement.

I wouldn't be here at all if wasn't for 2008. No mercy.

 

[EastWest Gal]

Being a long-term holder of passive index funds, my "strategy" mainly involves not checking my balance on days like this, and waiting until we've had a few up days before checking again.

Hopefully we'll actually have a few up days, or I'll have to brace myself before logging in

Glad to know someone else uses my coping strategy. And everyone else on this thread sees it as a buying opportunity. I'm sitting this one out. Just starting ER and I don't have the courage to buy stocks right now.

 

[NW-Bound]

... Sure it's timing, and looked at as a no no...

Timing, schtiming, or rebalancing... Who cares if you make money, which is the most important thing. If one screws up and buys high/sells low, then it's bad, else it's good.

A successful market timer who sells high and buys low acts as a market rebalancer, without whose restoring action the market fluctuations would be even higher. Even if I do not buy now, I applaud and will cheer on those who step up to buy. And while I did not sell earlier, I appreciated those who sold, which would keep a bubble from forming.

 

[robnplunder]

I am hoping for a decisive correction. I want to see mass capitulation. I want to see grown men cry. That's my cue to time this market.

 

[ejman]

A big problem of having a wide rebalancing band is that one misses all the fun and excitement, "don't just stand there, do something!" Before all the current (modest) mayhem I was sitting at equities at 54.1% wondering what I would sell if they hit my upper limit of 55%. Then I just checked and with all the fun of the last few days equities are at 52.4%. Jezz, nothing to do until they get to to the lower limit of 45%. You timing guys have all the fun!

 

[Walt34]

I am hoping for a decisive correction. I want to see mass capitulation. I want to see grown men cry. That's my cue to time this market.

Wait until stock brokers start jumping out of buildings?

 

[audreyh1]

A big problem of having a wide rebalancing band is that one misses all the fun and excitement, "don't just stand there, do something!" Before all the current (modest) mayhem I was sitting at equities at 54.1% wondering what I would sell if they hit my upper limit of 55%. Then I just checked and with all the fun of the last few days equities are at 52.4%. Jezz, nothing to do until they get to to the lower limit of 45%. You timing guys have all the fun!

As many times as I caught that falling knife in 2008, I'm happy to have wider bands now.

But I always end up doing some rebalancing in Jan anyway when I withdraw.

 

[audreyh1]

Wait until stock brokers start jumping out of buildings?

That requires a crash, I believe

 

[NW-Bound]

I am hoping for a decisive correction. I want to see mass capitulation. I want to see grown men cry. That's my cue to time this market.

You were not here on this forum in the 2008-2009 time frame. Much wailing and teeth gnashing here then... Some capitulated, sold, then were not heard from again. Some bought low, but the wrong stock.

It was an exciting time.

A big problem of having a wide rebalancing band is that one misses all the fun and excitement, "don't just stand there, do something!" Before all the current (modest) mayhem I was sitting at equities at 54.1% wondering what I would sell if they hit my upper limit of 55%. Then I just checked and with all the fun of the last few days equities are at 52.4%. Jezz, nothing to do until they get to to the lower limit of 45%. You timing guys have all the fun!

What fun? Just a bitty correction so far, so I have not done much but to harvest a bit of loss, which will allow me to do a larger Roth conversion.

A 20 or 30+% drop, now that will get one's heart pumping, neck hair raising, eyes dilated, palms sweaty...


PS. All the recent excitement over the little market movements so far shows me how people have short memories, how they quickly become complacent after a smooooth ride. There's nothing like a welcome correction to shake their shoulders and get them to sit up. Long live market corrections!

 

[audreyh1]

I agree that this is lose enough to count as the minimum correction (10%). And it was way, way overdue. It's good to occasionally shake out the weak hand, and serve the speculators and hedge funds some pain.

That was a pretty good whoosh and recover on high volume yesterday, and even a good retest today (got down to 1825 I believe). But these things usually take weeks to sort out even after things seem to settle down, and so I would expect a slower, gentler drift down to test the lows again, or even go lower.

So it could still end up being a stronger correction. Until we are out of October, I don't think we have any idea if we are close to done.

We'd have to do a quite a bit worse for me to reach my triggers and rebalance before Jan.

 

[NW-Bound]

I am not buying now because I did not sell some earlier to get more cash, else I would start to nibble.

It is wrong to say that a market timer must successfully get out at the top and to get in at the bottom. If my sell/buy results in me having more money or shares than "buy-and-hold", or "buy-and-mechanically-rebalance", I consider it a success.

 

[ejman]

As many times as I caught that falling knife in 2008, I'm happy to have wider bands now.

But I always end up doing some rebalancing in Jan anyway when I withdraw.

Yup, that particular one tested everyone unless they had such tremendously wide bands that rebalancing was out of the question even then. It is nonetheless very difficult to move into equities when the sky really is falling...

 

[NW-Bound]

Setting a wider band for rebalancing means you think that lets you buy closer to the "bottom", which is a form of market timing because you do have a certain expectation.

PS. Basically, we all understand the risk/reward trade-off of investments, and that includes every asset, just not stocks. Rebalancers or market timers both believe the risk/reward trade-off of investments change with price, but they act on that price movement with different mechanisms.

 

[kgtest]

I was thinking something similar. I noticed that even on an ugly day like today a few of the more badly battered things I own or watch are starting to move up. This also looks like a day to collect profits on treasuries. I liquidated much of a stake in a leveraged treasury ETF today.

I forgot to put my hands in the air for that drop... I never stopped DCA'ing...although I am not going to lie, human instinct did rear its ugly head. I wouldn't mind if energy rebounded as well but that is unlikely. Either way I kept my hands inside the ride for that one.

 

[Hamlet]

Ebola and ISIS are sideshows from an investment standpoint. They aren't going to affect corporate earnings.

The big worry I have is Europe and the Ukraine situation. We have a nuclear power that seems willing to burn the world down. That worries me.

It also still seems possible (say 30% chance) that the Euro will end up failing.

But those were both worries a year ago.

The laughable thing is that even as everyone is selling and running around with their hair on fire, unemployment claims just came in at a 14 year low, industrial production spiked, and capacity utilization is now at 79.3% - just a hair shy of the 80% and up level that typically starts sparking heavy capex spending. Sounds terrible, doesn't it?

 

[audreyh1]

Setting a wider band for rebalancing means you think that lets you buy closer to the "bottom", which is a form of market timing because you do have a certain expectation.

PS. Basically, we all understand the risk/reward trade-off of investments, and that includes every asset, just not stocks. Rebalancers or market timers both believe the risk/reward trade-off of investments change with price, but they act on that price movement with different mechanisms.

Not really. It just means you don't rebalance unless it's a very strong correction or bear market.