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Dave & Donald Moenning

Mr. David Moenning is a full-time professional money manager and is the President and Chief Investment Officer for his Chicago-based Registered Investment Advisory firm, Heritage Capital Management (...

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5 Reasons The Market Correction Is Long Overdue

When trying to succeed in the stock market, at least half of the battle is learning to identify the type of environment you are dealing with.

If the two devastating bear markets that occurred since the turn of the century taught investors anything, it was that employing the same pedal-to-the-metal growth approach that can produce strong gains during a bullish market can be a recipe for disaster in a bearish environment.

The point is that investors need to be able to adapt to changing market environments and to recognize that different strategy tools are needed for different markets.

All Dips Have Been Bought

Although the battle cry "buy the freaking dip" was really born in the 1990s, it has been a highly successful approach since the Credit Crisis ended on March 9, 2009. More specifically, BTFD has become the dominant strategy since the European debt crisis faded to black in the latter half of 2012.

S&P 500 Weekly

spx_weekly_8.11.14.png

Take a look at the chart above. Note that since the fall of 2012, the dips have all been bought -- and bought quickly. It is clear to see that the declines on the weekly charts all display a "V-bottom" pattern, as traders have consistently plowed into stocks during each and every decline. In fact, traders have to go back to early 2012 to find a decline that produced a lower-low once a pullback began.

Related Link: 2 Signs The Market Is Stuck In Neutral

The key here is to recognize that while the current market action has certainly been a bit sloppy, the BTFD strategy remains entrenched in this market. Well, for now, anyway.

Current Market Is "News Driven"

The next important thing to know about this market is that the action is being driven by the geopolitical news out of Russia. Yes, the Fed matters. Yes, earnings matter. And yes, the economic data is worth paying attention to.

However, the bottom line is this market is being pushed around by the headlines relating to troop movements in Russia/Ukraine and what appears to be a developing trade war.

Therefore, it is important to recognize that the headlines can cut both ways. As investors learned on Friday, any news suggesting that tensions are easing can cause the algos to go into buy-mode in the blink of an eye.

Finally, history shows that a "news driven" market can disappear from the scene as quickly as it arrived.

A Meaningful Correction Is Long Overdue

Given the age of the current bull market and the length of time that has passed since the last decline of 10 percent or more, it is safe to say this market is overdue for a meaningful correction.

There have been countless articles written on this subject, but the key point to understand is that age alone does not cause the death of a move. No, something will need to come along to cause the current "buy the dip" mindset to change.

Related Link: 4 Things To Understand About This Market

However, the inordinate amount of time that has passed since the last big correction does mean that risk is elevated at this time.

Divergences Abound

As was detailed in our recent series on reasons to exercise some caution toward the stock market, there are a great many divergences in this market. While such conditions can and often do remain intact for quite some time, the message here is that the market's engine is not hitting on all cylinders at the present time.

Again, this situation is not enough to kill a bull market, but it does tell us that all is not hunky dory.

Bears Have Been Unable To Capitalize

Yet through it all, we must recognize that the bears have been unable to get much of anything going to the downside. And from my perch, this says a lot.

So, The Bottom Line Is...

Perhaps the key takeaway at this point in time is that this remains a bull market until proven otherwise. No, this bull is not young and spry anymore. It is true that the recent move higher left a lot to be desired from a technical perspective. However, there is just no telling how long this bull will run.

So, traders might as well enjoy the ride while it lasts.

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