Broker Check

Correction, Base, Breakout

October 13, 2020

Refer to our previous blog: Here

September 21st we noted that the S&P 500 was 10% lower than the all-time high.  Generally 10% market movements are classified as a common correction.  Check out this insightful webpage by Investopedia detailing exactly what a correction is:

It was at 10% below the recent highs that we noted that our risk appetite would have shifted towards more neutral instead of continuing to liquidate positions any further (selling with the downturn).  Sure enough, this correction has proven to be no different than the standard one we’ve experienced countless times over the past 3 years in that we immediately began to build a base.

A base is classified as a period, after a correction, where market prices tend to chop around within a range.  Often these ranges will begin to consolidate tighter and tighter as time moves forward until the base breaks.  Bases can break downward into larger corrections or even bear markets, but most often they break upward as investor sentiment sways back to positive and higher stock prices ensue.

We felt like the base broke out to the upside on October 5th.  Investors should be careful when deciding their confidence level of base breakouts, ensuring they do not overrun their risk parameters.  When inspecting a chart of the S&P 500 from Oct. 5 - Oct. 6th, notice the volatility that occurred Tuesday after the base break (see image).  This was sparked by comments from the President stating that stimulus hopes were in tangles; however, the market quickly shrugged off this negative sentiment before rallying over the next 4 trading days.  

What does all of this mean for the common investor?  

I think the largest takeaway should be to remain calm, unemotional and focus on what the market is offering you today rather than what you hope it will offer you tomorrow. If a company you have followed, or perhaps own some of their products, is trading 10-20% below where it was just a few weeks ago that sounds as if the market has miss priced or oversold that stock to some extent.  How do you react when you see a ‘SALE’ sign at your favorite store?  Do you run away in panic hoping that it will read ‘Additional Sale’ tomorrow? or do you step into the store and think, maybe this is the chance to take advantage of a good deal?

If you find all of this market information overwhelming, we’d love to sit down with you and help educate you in certain areas.  Usually people avoid what they don’t understand and are drawn towards what they comprehend!  Allow us to be an asset for you.

Thanks for following our blog and as always we hope you have gained some insight into the world of investing and the financial markets.