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How to Think About an Imminent Correction

By Frank Curzio, editor, Phase 1 Investor
Friday, March 23, 2012

The whole world is cautious on stocks right now.
If you don't believe me, just watch CNBC for a few hours. Almost every analyst has suggested taking profits at current levels. Most financial media outlets are predicting a pullback. My Growth Stock Wire colleagues, including Jeff Clark, are cautious. So am I, for that matter.  
But not all the news is bearish. It's just a matter of perspective.  
Before I get to the good news, let's cover the case for a correction...  
As Growth Stock Wire readers know, several technical indicators are flashing red. Stocks are overbought. The Volatility Index (or "VIX"), the market's fear gauge, is at super-low levels. These are signs that the market is due for at least a small correction.
The Russell 2000 Index also came close to pushing through its 200-day moving average (DMA) a few weeks back. The DMA is a simple way to gauge the overall health of a stock or index. Assets above their DMA are "healthy." Assets that fall below aren't in good shape.  
The last time the Russell 2000 fell below its 200-DMA was July. Within two weeks, the small-cap index collapsed nearly 20%.
If that's not enough to make you nervous, just take a look at the massive move in stocks off their October lows.
History shows us parabolic moves like these usually precede sharp pullbacks.  
So should you sell stocks and protect your profits? 
Before you do, you should know Peter Oppenheimer says, "The prospects for future returns in equities relative to bonds are as good as they've been in a generation." 
Peter has been the chief global equity strategist at Goldman Sachs for 10 years. He has a solid track record of predicting major market turns. And right now, he says you should buy stocks – even after the recent 25% surge in the S&P 500.
Peter believes companies' earnings will be much stronger than investors are giving them credit for. That's because new technology will lead to stronger corporate margins. He also expects big money to flow out of bonds and into equities as interest rates move higher, pushing bond prices down.
After reading his report, I like this contrarian call. After all, it's difficult to find a better asset class to invest in right now.  
If you're nervous holding stocks in the face of a potential pullback, the long-term tailwind Peter describes can give you some sleep-at-night comfort. And if the correction does arrive, his thesis is a good argument for buying more.
Good investing, 
Frank Curzio

Further Reading:

Porter Stansberry is also bullish on stocks right now. "2012 might be the best year for stocks that we've seen in more than a decade," he told DailyWealth readers today. Find out why Porter says stocks aren't done climbing yet here: Why I'm Bullish on Stocks in 2012.
Last month, a pair of analysts with a fantastic track record said it was time to buy everything, including stocks. These analysts are not big risk-takers, but they're convinced we're looking at a bull market. Get the full story here: Three-Decade Market Veterans Tell Crowd to "Buy Everything." 

In The Daily Crux
Market Notes
Gunmaker Sturm Ruger breaks out to an all-time high... surging demand for guns is forcing the company to stop taking new orders.  
Natural gas is down 46% during the past 12 months... oil prices are flat versus a year ago.  
Tech "cash kings" are on different paths... Apple rockets 51% in three months, while Google is up just 3%.  
Discount store uptrend continues... Dollar General and Dollar Tree break out to fresh all-time highs.
Market Watch
Symbol Price
S&P 500 1392.78 -0.7% +7.7%
Oil (USO) 40.14 -1.3% -4.3%
Gold (GLD) 159.57 -0.4% +14.8%
Silver (SLV) 30.54 -2.2% -14.1%
U.S. Dollar 79.65 +0.1% +5.7%
Euro 1.32 -0.1% -7.0%
Volatility (^VIX) 15.68 +3.6% -22.4%
Gold Stocks (^HUI) 465.32 -2.0% -15.8%
10-Year Yield 2.28 -0.4% -31.5%

World ETFs
Symbol Price
USA (SPY) 139.20 -0.7% +9.9%
S. Africa (EZA) 67.11 -1.6% +1.8%
Singapore (EWS) 12.60 -0.8% +0.2%
S. Korea (EWY) 59.01 -1.1% -0.5%
Taiwan (EWT) 13.40 -0.3% -2.6%
Japan (EWJ) 9.99 +0.1% -4.1%
Lat.America (ILF) 47.43 -1.4% -5.3%
China (FXI) 36.89 -1.4% -12.2%
Canada (EWC) 28.11 -1.5% -13.4%
Israel (ISL) 13.34 -0.7% -15.5%
India (IFN) 21.72 -2.6% -25.2%
Russia (TRF) 16.71 -1.9% -30.1%

Sector ETFs
Symbol Price
Retail (PMR) 25.64 -0.5% +32.5%
Big Tech (QQQQ) 66.98 -0.2% +22.1%
Consumer Svcs (IYC) 80.51 -0.2% +18.4%
Health Care (IYH) 76.35 -0.3% +15.1%
Big Pharma (PPH) 73.61 +0.6% +14.1%
Utilities (XLU) 34.59 +0.2% +14.1%
Real Estate (IYR) 61.54 -1.2% +9.6%
Biotech (PBE) 22.49 -0.1% +8.7%
Industrials (IYJ) 70.92 -1.1% +4.5%
Transportation (IYT) 93.15 -2.2% +2.4%
Telecom (IYZ) 22.59 -0.9% +2.1%
Media (PBS) 15.00 -0.5% +1.9%
Software (PSJ) 26.66 -0.5% +1.9%
Construction (PKB) 14.05 -1.3% +1.2%
Defense (PPA) 19.89 -0.6% +0.9%
Financials (IYF) 57.93 -1.2% +0.6%
Insurance (PIC) 16.08 -1.5% -1.0%
Internet (HHH) 70.21 +0.1% -3.8%
Water (PHO) 18.65 -1.1% -4.4%
Semis (PSI) 15.79 -1.1% -4.9%
Basic Mat (IYM) 69.69 -2.1% -9.4%
Oil Service (OIH) 121.00 +2.4% -11.4%
Nanotech (PXN) 6.61 -1.2% -31.0%
Alt. Energy (PBW) 5.62 -1.4% -43.9%

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