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Monday, June 19, 2006

Jim says, "Don't Bet the Ranch on a Rebound"

Jim Jubak, writer for CNN Money has this to say about the current correction taking place in the market:

"Since this downturn began on May 10, the Dow Jones Industrial Average ($INDU) is down 8% as of the June 13 close, the Standard & Poor's 500 ($INX) is down 7.5%, and the Nasdaq Composite ($COMPX) is down nearly 10.7%.

So when will this correction be over? It's certainly a legitimate and important question. But at the moment, it's the wrong question.

Instead, investors should be asking this: What are the odds that what has so far been an almost classical correction could turn into something worse -- a prolonged downturn that puts an end to the long-term rally that now stretches back to March 2003?

I don't think that rally is over yet. But there is no doubt that it is getting long in the tooth, and that the world's central banks seem perversely determined to put the global economy -- and thus the rally -- at risk. The next four months or so are likely to be critical. By the fall, I think the data will show relatively clearly if the rally is intact or if central banks have managed to kill the goose of growth.

A correction is a downward move that interrupts a stock market rally to correct the speculative excesses that always build up as a rally progresses. The average bull market correction since 1970, according to Sam Stovall of Standard & Poor's, is 13%. After the correction, the rally resumes from a new and sounder foundation.

So far we've clearly got Part 1. "
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