Bull Markets, Pullbacks And Corrections
Pullbacks and corrections are not fun, but they are necessary to refresh the market before the next leg up. Kevin wants you to look at them as opportu...
After a stellar run-up this year, it looks like we are finally getting the long-awaited pullback.
And I, for one, couldn’t be happier. Why? Because the ‘fear’ of a pullback was keeping plenty of investors on the sidelines.
And the sooner we can get this over with, the sooner we can get back to the bull market rally.
What’s important to know is that pullbacks and corrections are common.
Every bull market has them.
In fact, stocks usually pull back about -5% roughly 3-4 times per year. (A pullback is defined as a decline between -5% and -9.99%.)
We actually saw one earlier this year in late February/early March when the Dow pulled back by -4.57%, and the S&P pulled back by -5.75%.
Stocks usually correct -10% on average about once a year. (A decline of -10% to -19.99% is called a correction.)
That’s what the Nasdaq did back then with a correction of -12.04%.
But these are the pauses that refresh before the next leg up.
And from those March lows, the Dow then surged by more than 16%, the S&P by 22%, and the Nasdaq by 28%.
Now the markets are at it again.
From the recent highs, the Dow at its worst has pulled back by -5.66%, the S&P by -5.66% as well, and the Nasdaq by -7.30%.
After shaking the tree, it will be exciting to see how high the market can go this time.
While pullbacks and corrections are never fun when they’re happening, if you know these are commonplace moves, you can instead look at them as opportunities to buy rather than places to sell.
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All of the major indexes have already pulled back by at least -5%.
The question now is, will there be more, or is this it?
Let’s take a look at the S&P and see where the support comes in.
With the S&P’s September 2nd all-time high of 4,545.85, a -5% pullback would come in at 4,318.56 (which we are actually back above as of the close of Friday, 10/1).
If there’s more, a -10% correction would come in at 4,091.27. That’s just below the 200-day moving average of 4,134.71 (which is also considered support), and just under a gap left on the chart from earlier this year on May 15th (also considered support).
What about -15% or -20%? A -15% correction would be seen at 3,863.97. Incidentally, that would more than fill in a gap left on the chart at 4,020.63 from April 1st.
And a -20% correction (let’s call it a -19.99% correction, since technically, a -20% decline is a bear market, which nobody is calling for), would come in at 3,636.68.
For The Record
Why am I stopping short of -20%? As I said, I haven’t seen anybody calling for a bear market.
And why would they? Bear markets typically coincide with recessions. And recessions mean two quarters in a row of negative GDP.
Full-year GDP this year is forecast at 5.9%, which would be the fastest growth rate in 37 years. And the Fed sees GDP in 2022 at 3.8%, with 2023 at 2.5%.
So no need to waste our time with recession talk. And by that measure, no need to waste our time with bear market talk either.
Plus, interest rates are near zero. And it should be noted that over the last 50 years, there’s never been a recession (aside from last year’s pandemic-induced plunge), when the Fed Funds rate was under 4%.
And the Fed has insisted that interest rates will remain near zero for the foreseeable future (meaning at least through the rest of this year, maybe all of next year, and a portion of 2023).
But even when they do begin to raise rates, they are essentially starting from zero. And at quarter-point moves (even half-point moves), it would take years, from the time they begin, to get to that level.
So knowing all that, investors should be downright giddy over this recent pullback.
Because we will be able to pick up stocks at prices we only wished we could have gotten in at previously.
Riding the Bull
While the indexes have pulled back by roughly -5% or so, there’s plenty of stocks that may have done worse.
And there’s nothing wrong with raising cash by getting out of your laggards and poorest performers – stocks you know you should have gotten out of long before this pullback even happened.
But then replacing them with the strongest stocks that will be the new market leaders.
You don’t have to go all in at once. But you can start taking nibbles at these discounted prices.
That’s true for your favorite stocks. As well as plenty of new stocks that you may not have even heard of yet.
But the time to get ready for the next leg up is now.
Do What Works
So how do you fully take advantage of this long-awaited pullback, and not squander this opportunity with preventable mistakes?
By implementing tried and true methods that work to find the best stocks.
For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 26 of the last 32 years with an average annual return of 25.4% per year? That's more than 2x the S&P. But when doing this year after year, that can add up to a lot more than just double the returns.
And did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!
Those two things will give any investor a huge probability of success and put you well on your way to beating the market.
But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.
So the next step is to get that list down to a smaller, actionable list of stocks that you can buy.
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One of the best ways of getting into the best stocks is to see what stocks the pros, who use these methods, are picking.
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Regardless of which one fits your personal style of trade, just be sure you’re following proven profitable methods and strategies that work, from experts who have demonstrated their ability to beat the market.
The best part about these strategies and stock picks is that all of the hard work is done for you. There’s no guesswork involved. Just follow the experts and start confidently getting into better stocks on your very next trade.
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Thanks and good trading,
Kevin Matras serves as Executive Vice President of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to download Zacks' newly released Ultimate Four Special Report now.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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