Stock Market Decline Coming Soon?

Early this week I wrote in one of my blogs hat the signs are becoming more evident of a coming market correction to the downside. This is a touchy issue because it seems there is always somebody predicting a market decline. However, there have been a growing number of articles in the press this week that support this notion. There have also been a growing number of technical indicators that support this notion. One article that caught my attention I consider to be considerably noteworthy. A link to this article is provide below and worthy of your consideration.


Published today in marketwatch.com article, we read the following excerpts from that article.

“Over the past 45 years, the stock market has lost more than 20% each time three warning signs flashed simultaneously. Mark Cook, a veteran investor who called three previous market crashes, believes the U.S. market is in trouble, to the tune of a 20% pullback.

The signals are excessive levels of bullish enthusiasm; significant overvaluation, based on measures like price/earnings ratios; and extreme divergences in the performances of different market sectors. They have gone off in unison six times since 1970, according to Hayes Martin, president of Market Extremes, an investment consulting firm in New York whose research focus is major market turning points.

A bear market is considered a selloff of at least 20%, with bull markets defined as rallies of at least 20%. No bear market has occurred without these three signs flashing at the same time. Once they do, the average length of time to the beginning of a decline is about one month, according to Martin.

All three of these signals are flashing today.”

Now what? Following are my comments for a bigger picture consideration of the above report.

All stock traders and investors  must be aware that:

• there are risks in the market, all the time,
• there is volatility in the market and it should not be feared, and
• good money management principles must be followed to minimize risk.

A key area of concern is how to minimize losses in the midst of volatility. Keep in mind that volatility is what creates opportunity for investment profits. Four things to do when these potential corrections are evident are:

1. Make sure that there are tight stop losses on each of your investments. This will automatically exit you from a position with minimal loss if the stock starts to decline in price.
2. If you have risky investments, you might want to sell them and look for better opportunities.
3. It’s always good money management to go into a stronger cash position before a pending  correction  takes place.  For some traders this means that 45% to 65% of your portfolio is in cash or money market funds.
4. Hold your cash until after the market decline. Once the market decline has taken place, you have an excellent opportunity to make excellent profits as the market returns to a higher more profitable position.

Look at a potential bear market with those four recommendations in mind and you’ll come out the other end with a much stronger portfolio.