|Back to main|
The Real Debate: Is the Stock Market Due a Correction or Collapse?
10/4/2012 3:15:00 PM
By: Martin Tillier
By Martin Tillier
There is a huge, and important, debate going on in the U.S. right now. No, I am not talking about the series of talking point swapping sessions that Mitt Romney and Barak Obama embarked on this week. I am more interested in whether the market is due, or overdue, a correction, or even a collapse. One year ago, on October 4th 2011, the S&P 500 closed at 1074.77. At the time of writing it is at 1461.18, an increase of 35.95% in a year. Even with the now traditional swoon in May, the index is up around 16% year to date from the 2011 close of 1257.60. It is hard to get away from the feeling that the move up is overdone, but it may help to compare the bullish and bearish cases.
I guess when all is said and done you pays your money and you takes your chance, so the next question is, where do you pay your money?
If the bullish case is more convincing to you, then large, multi-national companies such as General Electric (GE), Google (GOOG) and Boeing (BA) are well-positioned to benefit from global growth. If the recovery does begin to accelerate, then this year’s gains in small caps, as represented by the SPDR S&P 600 Small Cap ETF (SLY) will look puny compared to what is to come, given the sector’s tendency to outperform in boom times. The recovery in housing will be key, so an investment in the homebuilding sector via the iShares Dow Jones U.S. Home Construction ETF (ITB) or something similar would make sense.
If, on the other hand, you are more inclined to the bearish case, there are other options, but the choices are less obvious. A relatively small investment in the VIX, by way of the iPath S&P 500 VIX Short Term Futures ETN (VXX) would pay off in a big way in the event of collapse. Even at current elevated levels, gold, whether through physical holdings or through the SPDR Gold Trust ETF (GLD) will benefit from any slow down or correction. I would not recommend leveraged bear ETFs for most investors, however. These are useful as short term trading instruments, but are designed to provide daily protection, not long term returns. If you believe a correction, rather than collapse, is imminent, then simply taking some money off the table to be deployed after a 10% or so drop is still the best way to play it.
If anybody is interested in my take on the debate, I believe one factor outweighs everything else in the coming months. Twenty years in the Foreign Exchange market taught me that taking on Central Banks was usually a losing proposition. While the ECB and Fed adding liquidity may have undesirable long-term consequences, it should serve to slow any downward momentum. I am prepared to ride on the tiger’s back for a while longer.