Corrections

Call it now: correction, trend change, market shift?

Individual reaction is dependent upon assessment of the short-term move

Problem: Intermediate and long-term plans are set in current time

Following a Correction

Definitions:

A correction or bear market is a price adjustment and occurs when an item which has been overvalued starts returning to reasonable value based upon perceptions and actual valuations of related items.

-- A short-term down-trend is called a correction.

-- A long-term down-trend is called a bear market.

Price adjustments start with a downturn and are followed by an intermediate-term downtrend and basing process. This process applies to a specific instrument (stock, bond, etc.), to an industry group, a commodity and to an entire market (stock market, derivative market group, etc.).

The duration depends upon:

1. How over-extended the price was;

2. How much speculation had accumulated in the price;

3. How investors respond to the situation's potential.

The reason that the adjusting downturn takes longer than new buyers (who are obviously believers) expect is:

A. The fun for existing holders was taken out of speculating in this instrument when they started losing money;

B. Investors' and speculators' losses must be accepted and then acted upon by selling over time;

C. Profit taking will continue. That is, upon each up move, holders who have lost the desire to own will sell considering themselves fortunate to catch this little extra increment up.

When the old holders' profit-taking and speculation is done the correction, down-trend or bear market ends.

See also: Psychology

The investment axiom that is always valid: Caveat Emptor

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