Don't Fear a Stock Market Correction
Stocks failed to continue their winning ways during the month of
August with the
SPDR S&P 500 ETF
(NYSEARCA:SPY) posting a loss of 3%. Now we are heading into the
historically dreary month of September with equities clinging to
uphold their strong 2013 momentum. You can almost feel the
white-knuckled grasp of the bulls holding onto their seats as the
bears circle the wagons. It seems that the major averages are
softly treading the line between mild pullback and full-blown
correction, which has some market-watchers nervous.
Many experts have pointed to light trading volume , geopolitical instability, and lofty stock prices as a perfect recipe for a correction. It seems that the bears just need a little bit of a catalyst and it will send the weak hands fleeing to lock in gains and reposition their portfolios with higher cash positions. However, betting against the market has been an exercise in futility this year as stocks have shrugged off nearly every negative headline.
The chart above shows that SPY has briefly fallen below its 50-day moving average on several occasions, but it always had the gumption to move steadily higher. My research indicates that over the last 10 years, this index has tested its 200-day moving average in every year except 2013. September could be the month that changes that statistical anomaly and allows for a healthy pullback.
In my opinion, a correction of 8-10% in stocks should not be feared. In fact, this would be a healthy event for equities to work off some of their overbought momentum and allow for new money to come back into the market at more advantageous prices. In addition, a falling market would likely support gold and bond prices as investors reassert a flight to quality into the SPDR Gold Shares (NYSEARCA:GLD) and iShares 20+ Year Treasury ETF (NYSEARCA:TLT). GLD in particular has aligned itself as a safe haven asset class over the last several months as a lower US dollar and increased demand have supported precious metals prices.
My game plan over the last several weeks has included lightening up my equity exposure and carrying a higher-than-normal cash position. This will allow me to take advantage of any pullbacks to add to my equity holdings and insulate my portfolio from the majority of a downward move. I am currently avoiding holding any short positions such as the ProShares Short S&P 500 ETF (NYSEARCA:SH) as I think that there are still too many factors in play that will keep stock prices from falling into the abyss.
I will be using additional weakness to add to low-risk equity plays such as the iShares MSCI US Minimum Volatility ETF (NYSEARCA:USMV) and the PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA:SPLV). Both of these ETFs give you the opportunity to add to holdings in defensive sectors of the market with quality stocks that have fewer price fluctuations. In addition, I am favoring the technology sector, which has continued to outperform the broader market. One of my favorite technology-related ETF choices is the First Trust NASDAQ Technology Dividend ETF ( TDIV ).
Remember that when you do decide to re-enter the market, you do so by averaging into new positions slowly and using pullbacks to your advantage.
Read more from David Fabian, Managing Partner at Fabian Capital Management:
Will It Be a September to Remember?
Waiting for the Turn in Emerging Markets
Time to Buy the Dip in Stocks? Be Wary