A Simple Strategy to Profit from a 10% Correction

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A Simple Strategy to Profit from a 10% Correction

michael vodicka

Greetings Friends,

Are you nervous about the stock market? If you answered yes, you’re not alone. Please read on. Not only will I help ease your fear – I’m also going to show you how you can actually profit while other investors are mistakenly hitting the panic button.

But for now, let’s take a look at how 2016 has been unfolding.

It has already been a bumpy year for global and U.S. stocks.

Half way through the first quarter, here’s a look at global returns.

  • Vanguard Total World Stock Index (VT): -10.30%
  • S&P 500 (SPY): -8.43%
  • iShares Emerging Markets (EEM): -8.92%

That weakness is being driven by three factors.

The Global Economy is Slowing: The IMF recently downgraded 2016 global GDP growth to 3.4% from 3.6% – largely driven by slower growth in China. While that would still be better than 2015s 3.1%, the big ‘global recovery’ still feels very weak and shaky to a lot of consumers. That;s not good for spending.

Third-Quarter Earnings Season was Weak: In the U.S., third quarter earnings season wasn’t great, with earnings falling 4.7% from the same period last year. It was the third consecutive quarter that earnings have contracted. Earnings are expected to grow again in the second half of the year – but earnings are no catalyst for stocks right now.

The Fed is Trying to Raise Interest Rates: And finally, in December the Fed raised interest rates for the first time in more than nine years. Although rates have barely been effected by the move, it has been a drag on sentiment. By the way – my take is that the Fed made a policy error – is done raising rates – and will eventually launch QE4 and push interest rates into negative territory. It’s already happening all over the world.

Japan and Europe Both Adapt Negative Interest Rates

Fed Chairwoman Yellen: Negative Rates Possible in the U.S.

There’s no question stocks are facing some challenges. However, the truth is, any weakness in the market is a great time to buy. Don’t believe me? I can prove it to you.

According to a study from mutual fund company American Funds, from 1900 to December of 2014, a pullback of 10% or more happened about once every year.

Bear markets (more than a 20% decline) are rare, happening only once every 3.5 years.

Take a look at the frequency of corrections and pullbacks in the table below.

bear markets 7-22-16

Even when the S&P has experienced its worst crashes it has always recovered.

For example, in the fall of 1987 the S&P 500 fell 22.6% in one day. This day is commonly referred to as Black Monday. It was a traumatic event for investors.

But the worst move any investor could have made was to bail out on stocks. In fact, the best move was to buy hand over fist. By the end of the year, a little more than two years later, the S&P 500 had fully recovered. Today, 1987’s Black Monday is barely a blip in the history of the market.

spx 1987

But despite the challenging outlook, this table tells me that the time to be aggressive is when fear and pessimism are running strong. And right now both are hitting multi-year highs.

Looking forward, I do see potential catalysts for stocks.

  • The Fed holding off on a rate cut.
  • OPEC letting the price of oil rise.
  • War in the Middle East making the price of oil rise.
  • U.S. earnings returning to positive growth in the second quarter.

For the time being be patient. Younger investors have nothing to worry about. Time is working in your favor. This won’t even be speed bump down the line. For older investors – don’t make any impulsive moves. If you’re nervous about the stock market – think about increasing your allocation to bonds and reducing your allocation to stocks. This is a simple but very effective strategy. Its called capital preservation.

I’ll be back in a few weeks with another update. In the meantime, check out my new website. This is my 4th one. It’s definitely the best website I’ve ever had. I’m proud of it. But here’s what I’ve learned about websites – they’re never really done. I’m always trying to improve my digital image and reach.

Vodicka Group, Inc.

Your Investment Partner,

Mike

This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.

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