Stock Market Correction: How Bad Will it Get?

And if somebody says they do and offers a prediction, do not trust them.

Predictions are based on analyzing current trends and extrapolating them into the future. As flawed as this process may be, it can still work in some instances. But not in the stock market. The stock market is a discounting mechanism, always looking 3 - 6 months ahead. All known events are already priced in. So if anything, the stock market predicts the real economy, not the other way round. Looking at the current economic indicators does not help ascertain the future direction of the market. But if you want to see where the real economy will be down the road, look at where the stocks are today.

Stock trading is speculative: traders take positions in anticipation of future events. If the expected scenario does not play out, or new events come into play, they adjust their positions accordingly. No prediction can account for events that have not yet occurred, or for what effect they will have on the market. Even if you could factor in all known and future events, you still won't know how they will interact, and where they will push the market.

The stock market deals with human emotions. Market participants may view the same event as a negative or as a positive, depending on their mood. How do you know what mood investors are going to be in, say, in November?

Stocks move in trends. Trends have a tendency to feed on themselves. It means that a 10% decline can reverse or turn into a 20% one. You never know. Depends on how optimistic or pessimistic investors feel.

Looking at historic records - frequency and depth of corrections - can provide some insight, but, again, corrections can vary considerably by length, depth, breadth, etc. You may find out that on average the market corrects 3 - 9 months and declines 10 - 20%. And?

So what's an investor do? Sit and wait. If you employ sound buy and sell rules, you should be out of the market at the early stage of a correction, ready to get back in at the first signs of a rebound.

Most predictions simply extend current trends indefinitely into the future. But most miss the turning points. It's easy to look at the current trend and say: I expect more of the same. But what will turn the current trend around, and when? That's the only question that matters in stock trading. Yet I have never come across a prediction that provided an accurate answer.