Everything is due for a correction now: stocks, commodities, and several currencies. The stock market isn’t overvalued; it’s just had a great run and a correction would be healthy. In addition, the majority of the world’s commodities have also been in a bull market and they too are due for a correction.
Just because one’s economic analysis suggests that a correction would be healthy for the long-run action in stocks and commodities doesn’t mean it’s going to happen. If the S&P 500 Index pulled back 15% from its current level, I’d be a new buyer. If the price of gold retreated to $1,200 an ounce, I’d be a new buyer of gold stocks—a lot of them. From my perspective, the price trend is still up for both stocks and commodities. I’d like to see a correction in a number of markets, because I don’t like seeing securities go up in value like they’re following a straight line. I also would like a more attractive entry point for considering new positions.
If there was a pronounced correction in precious metal prices, I would seriously consider investing in gold and silver in a very meaningful way. I would take on new positions in intermediate producers as well as several juniors. I’d also own a gold fund or ETF that actually holds physical gold and silver bars in a vault. With all the risks out there (e.g. sovereign debt defaults, war, inflation, higher interest rates, housing prices, and unemployment), gold is a must-have asset. Perhaps for the rest of this decade.
Wall Street analysts and investment newsletters have been quite bullish since the beginning of fourth-quarter earnings season. Some see this as a sign that the current bear market rally is coming to an end. I don’t know what’s going to happen to stock prices, but my view is that it’s probable that the S&P 500 Index will keep ticking higher this year. My prediction is 1,500 on the index, as you know.
There’s a lot of risk out there that could sap global investor confidence and I think this is why a lot of individual investors are still sitting on the sidelines, not participating in equities in the way they were before. Individual investor confidence was decimated during the subprime financial crisis and the broader stock market still hasn’t recovered from the previous bubble in the technology sector. So, you have a situation where most of the market is being played by professional investors or speculators. This makes the price moves more pronounced and it almost removes a level of rationality from the marketplace, because all the action is with a short-term time horizon for making money.
It’s important for equity investors to keep listening to what large corporations say about their operations. It’s also very important for equity investors to follow the Dow Jones Transportation Average. This index is teetering on breaking down and it may be the best indicator yet for an upcoming stock market correction.