The S&P 500 has made a 6%+ “small correction” as of yesterday. NOW is the time to buy U.S. stocks. Here’s why.
Risk:reward is the guiding principle for medium-long term traders and investors. Here’s the essence of risk:reward.
If you go long when the market is falling, do you have a margin of safety on your side? If you WAIT long enough (but not too long), will your loss turn into a profit?
Our studies suggest that the current “small correction” will be closer to 10% than 6%. The S&P has already fallen 8.1% as of Monday’s close! So even if this small correction is 11% or 12% or 13%, your risk is a maximum of 5%!
Our Medium-Long Term Model states that there is no significant correction or bear market on the horizon.
Once this correction is over, the S&P 500 will surge 20%, 30%, or 40%! That’s a risk:reward ratio of 1:4 or 1:8! The risk:reward profile is terrific right now. The U.S. stock market will surge in the last 1-2 years of this bull market.
Stop trying to catch the market’s exact bottom. No one can consistently and accurately catch market bottoms. Nobody is a god, so don’t even bother trying. I’ve seen countless traders try to catch the exact bottom. For every 1 bottom they catch perfectly, they miss out on 3 bottoms. Think risk:reward. This is not a bottom that you want to miss.
Here’s the S&P 500 as of February 5, 2018.
Stop trying to find a reason
Everyone in financial media is trying to find a reason for this correction. Here’s the reality:
Most 6%+ “small corrections” have no reason. Any “reason” that the media finds is just an excuse for the stock market’s selloff. Most small corrections are purely technical in nature.
The rally prior to this correction was the longest rally in history without a 6%+ “small correction”. Hence, mean reversion was to be expected.
And no, the stock market did not fall because of “rising interest rates and inflation fears”. Historically, rising interest rates have not been consistently bearish for stocks. A bear market in bonds does not = a bear market in stocks. Rising rates was merely a catalyst/excuse for the stock market’s selloff. It was not the real reason.
Don’t lose sight of the bigger picture
Don’t be afraid to buy stocks just because the market is falling. Look at the medium-long term picture from an objective point of view.
The U.S. stock market and economy move in sync over the long term. U.S. economic growth is healthy right now and there are no major signs of deterioration. The European economy and emerging market economies are growing as well. This is medium-long term bullish for the stock market.
U.S. corporate earnings are surging and show no signs of slowing down. The recent earnings season (Q4 2017) was the strongest earnings season in years. Earnings growth is 13.4%! This is also medium-long term bullish for the stock market.
Yes, stock market valuations are high. But valuations don’t cause bear markets. They provide a reason for one, but they are not the catalyst. If valuations caused bear markets, then you cannot explain why the stock market soared from 1995-2000 despite insanely high valuations. Valuations have been consistently elevated over the past 25 years. This is probably due to low interest rates, which are still historically low.
*Interest rates would still be historically low if the 10 year Treasury yield went up more than 1% to 4%.
Remember, corrections are a normal and healthy part of bull markets.
The Medium-Long Term Model does not use a price-based stop loss. It will only close out my UPRO position if it realizes that the bull market has started to turn into a bear market. Read The best stop loss strategy.