Stocks in Correction Territory; Why Now Could be a Great Time to Buy
February 29, 2020 | 15144 Views
Stocks closed sharply lower yesterday, putting all the major indices in correction territory.
What is a correction?
It's a pullback between 10% to just under 20% (19.99%). (A pullback of 20% or more is defined as a bear market.)
Corrections in bull markets are normal and healthy. Granted, it doesn't feel normal or healthy when it's happening. But it's a common occurrence.
In the past, there have been a few similar corrections. The average range of each correct is about 12% and the average length is about 3-5 months.
This correction however only took 6 days. And the market is currently down 9.88%.
For perspective, this up-trending market, which is nearly 6 months old, has already seen 2-3 corrections including this one. Again, a common occurrence.
The only reason why this correction feels so scary is because it happened so fast, and it's coinciding with a health scare – the Corona virus.
But quite frankly, they all feel scary. The last major one we had was in 2018. Remember that one? Everybody was calling for a recession because of the so-called trade war and tariffs. Total nonsense. Yet the correction happened anyway. But so did the epic rally that followed.
Will there be more downside? It's possible.
But the current correction is not that far off from the average.
And a correction is all we think this is.
In fact, in spite of the Corona virus worries, a few companies will record positive performance.
Here is a caveat. The markets have witnessed across-the-board price correction. A number of our clients have been making enquiries about stocks that are now available ‘cheap’. However, these stocks have weak financials, suspect managements and poor prospects. We continue to advise our clients to opt for stocks of fundamentally strong companies… and there is no dearth of such companies. In fact, this correction now makes available a number of fundamentally strong companies at very reasonable prices.
Here are some pointers on spotting winning stocks that should form part of your portfolio:
- The company should belong to a leading industry. Every bull market has its own set of leaders which are almost entirely different from the leaders of the previous bull market. To identify which industries are on the forefront, some research and analysis will give you clues on these leaders.
- The stock is trading near its 52-week high (at least 20% from this level).
- The stock’s price trend is showing strength, which can be judged from the return it has generated in the last few months in comparison to its peers.
- Most importantly, the company should record growth in its earnings and other leadership qualities as explained above. Higher earnings should be the result of higher sales and increased margins.
Remember, markets are going to continue being volatile thereby presenting multiple opportunities to investors. However, select your investments based on the above-stated factors in order to generate wealth.
The truth is, when the worst of this outbreak is finally behind us, stocks are expected to soar as pent-up economic demand is unleashed.
Make sure you take full advantage of this correction.