CORRECTION: Bull Markets Always Climb "A Wall Of Worry"

A great article form the The Association of Investor awareness.

Read it but take it all into perspective don't run for the hills or panic. Just look at it in perspective !!

"The stock market rally that began in late December continued through the first three weeks of February. Since our last issue, the Dow and the Nasdaq gained 1.8% and 5.1% respectively.


Measured from December 20, the numbers were an even sweeter 7.1% and 13.2%. From the market’s recent low on October 3, 2011, the two indices are up a heart-warming 21.7% and 26.2% respectively. The added gains pushed stocks into official bull market territory. Of course, there is no guarantee that the happy condition will continue.

Bull Markets Always Climb “A Wall Of Worry”

Despite the strong upturn, many investors remain unconvinced that the bull has actually returned. They point to the many serious problems that could send prices back down. The list includes a barely warm economic recovery, the debt crisis in Europe, soaring energy prices, and a possible war with Iran.

Any one of the threats could give the market back to the bear. But, all major upturns begin while scary problems remain. Investors move back into stocks anyway if they think the problems are getting smaller.

But “The Wall” May Be Lower Than It Looks

For example, the debt crisis in Europe may have been defused by the February 18 agreement to bail out Greece for the second time. The Greek people won’t like wearing hair shirts for several years to bring the country’s deficit down, but that’s better than a meltdown.

A possible war with Iran is a bigger concern. But here too there are signs that a tragedy may be averted. Every country that’s involved, including Iran, seems determined to find a way to negotiate a solution to the nuclear issue. If the peace effort is successful, gasoline prices should come back down by themselves.

As to the lukewarm economic recovery, stronger growth is expected during the second half of the year. In any event, the growth we have now is an adrenalin shot compared to the Great Recession. Most American companies that survived the downturn have become very efficient and will be able to find good profits even in a soft recovery.

As it turns out, the recovery is not soft for many industries. For example, U.S. manufacturers are growing at about twice the speed of the broader economy. Ditto for exporters that are also benefitting from stronger than expected growth in China and other developing countries. Agriculture is also very profitable. In addition, many analysts think housing is finally starting to turn around.

A Correction Seems Overdue

Nevertheless, no big stock market move goes very far without a reversal. Since we had an unusually big upturn over the past few months, stocks seem likely to fall back before they make another big jump.

With a correction on the way, many investors may wish to take some profits off the table. At minimum, we think you should protect your gains with stop-loss orders. Even if you are investing for the long term, as we recommend, there is no reason to suffer near term losses. You will do better if you step aside during a correction and buy back in at lower prices after the scare runs its course. You don’t need to call either the top or the bottom to make this strategy work for you.

It can also be a good idea to sell any weak stocks that were pushed up by the rally. Sometimes the best strategy with mistakes is to cut them short at the best terms you can find, and put the money into stronger stocks."



Kind Regards


Steven

Steven Morris Chartered Accountant (SA)

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