As I mentioned in my bio and our mission about truth, we will attempt to educate you, temper fear, and neutralize the anxiety the news can create. So let’s start with the above question. Why is the market correcting?
I will give you some of what I have seen. The economy is in recession, there is inflation, the unwinding of positions in Japan when they raised rates, and honestly, there is too much noise (crap) to mention.
Simply put, this is a correction due (for now) to the following factors:. Let’s start with the obvious. The stock market HATES uncertainty!!!
- What are the uncertainties?
- The war in the Middle East, and elections. The war would be a short-term knee-jerk (lower)
- The elections, both parties are spenders, the difference is that they spend differently. Institutions invest their money based upon which party is in office. So why would they invest now? They don’t.
PROFIT TAKING!!!!
This is definitely profit taking (for now) and here is why they are taking profits.
- Read a long time ago over ½ of all institutions are on a fiscal year from October to October. That’s what the big money manager’s bonuses are based upon. Big institutions can’t sell everything in a day like you and I, that’s why corrections are a process. ARE YOU GOING TO LOCK IN YOUR PROFIT BASED BONUS? Of course they are. They’re human. (Call that the human factor)….Note: Often it is not surprising to see the S&P 500 and NASDAQ go up at the end of October. (Buying the big names and the index going up raises their bonus.) Let’s see if it happens this year.
- By selling now they do not fall under the 30 day wash rule (capital gains) if they want to buy that particular security back in October.
- EGO: Most I met have type “A” personality. Never in my life have I met a big money manager whose ego would fit into a warehouse. Sad but true and yes they brag about gains and hide their head in the sand and make excuses when things go against them. What do you think they want to talk about? The gain they took, or the gain they should have taken? These ego driven people are raising cash to re-invest. (tell ya why in a minute)
Two major reasons they invest towards year end. On a service type business often budgets are made on a fiscal year basis. They have spent what they are going to spend and what they haven’t spent is already earmarked for something. On a consumption basis approximately 35% of all retail sales are during the holiday season and approximately 30% of Gross domestic product comes in the 4th quarter of the year.
Institutions are gearing up for a market that I believe will see a fundamental change (from mega cap) when market conditions stabilize. We (hopefully) will have a federal reserve that is more accommodating (lower rates). And institutions are waiting to adjust. Which most likely means better performing mid-cap and small-cap stocks. It is likely with an accommodating Federal Reserve there is a strong possibility of money to shift from bonds to stocks. Which adds to an already large amount of sidelined money?
Remember I said the market and any stock is a simple supply demand equation? Right now the above details why there is more supply (selling) than demand (buying). And that’s why we are correcting. (For now)