The stock market made a 6%+ "small correction". Buy NOW


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

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.

Stop loss

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.

17 comments add yours

  1. Troy,
    For SOXL, should I wait or just buy? NVIDIA has earnings this week which I feel like will bring it down lower.
    Suggestions pretty please 🙂

    • Hi Ahmad,
      I can’t comment on something I don’t know much about. Doing so would be irresponsible of me.
      Kind regards,
      Troy

  2. Hello Troy,
    Kindly update, “Medium-Long Term Model” value on this page – https://bullmarkets.co/model/. It is still showing the value as on January 12, 2018.
    Since I am a regular visitor here, I am aware that you update the value on a weekly basis in a separate post,
    But, if somebody drops in new, then he/she will not be getting the latest value by visiting the page – https://bullmarkets.co/model/.
    Thanks in advance.
    With Regards,
    Praveen Vishnu Shamain
    from India

  3. Hi Troy,
    In your previous comments you said, the correction in stocks would probably lead to a correction in commidities.
    Despite the sizable drop yesterday Gold and Oil didn’t seem to be that much afected.
    Would you see that as a sign that there is more room to drop? (so the pressure in metals/oil/euro etc. escalates).
    Thanks.

    • No, I see this as bullish price action. Oil is making a pullback, although it’s a very small one. When a market that should go down doesn’t go down (i.e. gold/silver), it’s a bullish sign.
      Think of it this way:
      1. There’s a positive correlation between stocks and oil/gold/silver.
      2. The stock market tanks, and commodities don’t go down a lot.
      3. If the stock market bottoms and rallies, what will commodities do?
      4. Based on the positive correlation, commodities will go up. There’s bullish price action.
      Just my two cents. I don’t trade commodities because I don’t understand them as well as I understand the stock market.

  4. $XIV has been liquidated but seems it does not affect market as many expected . Could you pla have a comment re that Troy . It is too complex for me to understand everything around .

  5. Troy,
    I am finally in the market. Thank you so much for patiently responding to my queries, and being so reasonable!
    Your posts have been simply wonderful, to say the least.

    • No problem Ahmad. If I had to guess: I think it’s going to be a bumpy few days ahead. MAYBE a retest or marginal new low, but the downside risk is limited. Risk:reward
      Kind regards,
      Troy

      • Yep, that’s why I followed your advice that you gave me a month ago, about investing half first, and the other half later.
        I have a different personality, where even if it is down by 30% (3x leveraged), but I know at a high level the economy is doing well + we have a bull market, I don’t mind, given the bullish bias of the market.
        I’ll likely invest the other half in May, since from my observation the summer seems pretty volatile!

        • That’s a good plan. 🙂
          I find it to be quite interesting. The key to successful investing/trading is to stick to your plan and its risk management system. A lot f people go from being “long term investors” to day traders the moment the market tanks. Hence why a lot of people underperform the index.

  6. The equity market called me to complain about the fact that Troy skipped the daily stock market post today =)

    • Haha 🙂
      The daily stock market post will come out tomorrow morning. A lot of good developments.
      Kind regards,
      Troy

  7. Troy,
    Thanks a lot for your diligence with this blog. Late yesterday, my friends were freaking out about the market, but based on what you’ve been writing (especially yesterday) and what I saw on CNBC yesterday, I told them I was buying! I’m ~95% fully invested now. Hopefully it’ll work out!
    Best,
    Kyle

  8. Troy
    1) gold showed extreme relative weakness as the equity market was diving. There was no safety trade into gold as years back would have saw.
    2) short term bottom is in as the trend reversal in overnight futures showed that it hit the 200dma on the daily chart. The pattern was the same reversal pattern on brexit and the same reversal pattern on the trump election overnight futures sell off. All 3 events on the futures hit the 200dma then reversed sharply. Nobody is talking about this or picking it up.

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