The Market Is Correcting. Here’s Why That’s Good.
The
market continues to wade through what may very well be a short-term
correction. The NASDAQ has pulled back roughly 5.7% at its lowest
point yesterday.
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Corrections are a good thing
and this one is no different. It allows a couple of very favorable things to
occur, which eventually lead to continuation of the advance. First of all, at
the end of December investors were excessively bullish. After three straight
days of declines at the start of 2005 that was wiped out! Bull Markets need
to climb a wall of worry, with plenty of reasons that the rally cannot
continue. The recent declines have definitely seen that re-surface. Woes
about inflation, interest rates, budget deficits, etc. have dominated the
headlines. This is what it takes to get everyone looking the other way while
the market can march higher. In my opinion, which is of little value against
price and volume, the NASDAQ may see a decline in this correction as far as
1971, which is where its 200-day moving average sits along with the support of
10/2004.
The next thing a correction
does for an advancing market is allow us to pick the real leaders from the
pretenders. Growing up in Seattle, I am a Seahawks fan and I know plenty
about pretenders! Stocks like DHB and Jupitermedia (JUPM) may move
higher, but who can withstand their volatility? It is usual for growth stocks
to correct from 10-30% during a normal market correction. The true leaders
will be more towards the lower-end and are usually the best performers coming
out of the correction. Google (GOOG), despite worries about its
lock-up expiration that began in November, has corrected just shy of 20%. In
January, it has actually tightened up as the stock appears to be working
through a cup and high-handle base. Chicago Mercantile Exchange (CME)
has pulled back 13% from its high. A more volatile name, Travelzoo (TZOO)
has retraced 27%. In comparison, Apple Computer (AAPL) had only pulled
back 11% ahead of today’s earnings-related pop.
In looking at these and other
stocks, a correction allows us to pick names that stand out and are acting
better than others. As the market emerges from the correction, we find
ourselves well-positioned to profit.
In any case, the market began
its ascent from NASDAQ, 1,750 back in mid-August. After racking up a 25%
gain, it is usual and healthy to give some of it back before continuing
higher. Despite all the action we see and negative commentary, it is my
belief based on history and price and volume over the past couple of months
that we will continue higher. Now should be used as a time to find the best
places for capital.
Best of Luck and Enjoy your
Long Weekend!
Tim Truebenbach