A growing number of market watchers appear to be speculating that a general stock market correction could happen soon.
And any pullback in stock prices could be an opportunity for the well-prepared investor with a long-term focus.
A stock market correction could be imminent
There seems to be mounting evidence that a return to ‘normal’ economic conditions may not be as swift as hoped for by many. And there appears to be an emerging assumption that recovery from the lockdowns could yet be a long haul from where we are now. Such views look like they’re tempering some of the initial elation regarding the approval of vaccines for Covid-19.
Meanwhile, the stock market as a whole tends to be a key indicator of what may happen. My recent observation is that leading cyclical stocks have been turning down recently. I’m thinking of companies such as banker Barclays, housebuilder Bellway, mining giant Antofagasta and others. Of course, in the short term, share prices don’t always directly relate to the strength of trading in underlying businesses. But I have observed that cyclical stocks had been leading the charge higher in recent weeks. And that was probably based on the assumption that the underlying businesses would improve their trading.
Meanwhile, US trader Mark Minervini made a point this week when he Tweeted: “Money is rotating into laggard names and that’s usually a sign that a correction is looming.” Of course, traders and investors tend to reside at opposite ends of the stock-owning spectrum. But I like to follow Minervini’s insights because he’s very good at calling the big turns in the general stock market.
My interpretation of his Tweet is that momentum traders have been moving money out of stocks that have risen a lot into shares that haven’t yet gone up much. And although he’s focused on the US stock market, the UK market often mimics movements from across the pond.
A long-term focus
None of this really matters much to investors who focus on buying partial ownership of businesses by owning their shares. What does matter is the performance of the underlying business, its opportunities and threats, and the valuation a share price is assigning a company at any given time.
But weaker share prices can produce opportunities to buy the shares of great businesses at better prices. And that’s why I’m interested in the possibility of a correction in share prices.
I’m preparing by doubling-down on my efforts to identify and research stocks backed by companies with great businesses. I’m aiming for a holding period measured in years rather than in weeks and months. So, market corrections are less important when holding. But they can provide a decent buying opportunity when I have some cash to invest.
I reckon building and monitoring a watch list of quality shares is a great strategy. My list concentrates on the best names with the most attractive underlying businesses. And I’ll be ready to buy some of the shares while they offer better valuations during any correction in the markets.
Of course, I could be wrong and the general stock market may continue higher from here. Either way, I’m ready.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.