Growing Ranks of ‘Correction’ Camp Face Test of Time
The number of investment pros who expect a significant stock market pullback has reached the highest level in five years, one poll shows.
The Investors Intelligence newsletter of New Rochelle, N.Y., says its weekly survey of 130 investment advisers now shows 35.6% predict a stock market “correction” soon. In contrast, 41.5% of the advisers are bullish and 22.9% are bearish.
The “bull” and “bear” designations are pretty straightforward: Bulls believe that stock prices will continue to soar. Bears believe that prices are going to plunge and stay down for a long time.
The “correction” camp is tougher to pigeon-hole, but generally these are investment pros who believe that the market is temporarily overheating. This camp expects the average stock to fall 3% to 5% in the near term. After that, they believe that stocks will rebound to new highs. Hence, they see the market “correcting” its excesses.
Historically, the Investors Intelligence poll and others like it have often been so-called contrary indicators: Whichever way the alleged experts predict the market will go, it frequently does just the opposite.
In late December of last year, for example, the bears dominated the Investors Intelligence poll, at 41.1%. They were dead wrong. Stocks began to rocket on Dec. 20, carrying the Dow Jones industrial average from about 2,950 to 3,250 by mid-January and even higher since.
So why put any credence in the current high correction reading? Michael Burke, editor of Investors Intelligence, is less worried about how right the 35.6% correction camp may be than about how wrong they may be. Many of these pros, he suspects, are engaged in dangerous wishful thinking: They say they expect a mere 3% to 5% correction in stock prices because that’s what they desperately want--an opportunity to buy stocks a little cheaper, before the next bull market surge.
Burke believes that the market may be poised to teach the correction camp a lesson--as with the bears in December--by plunging much more than the 5% worst-case drop many pros foresee. “Our short-term market indicators are negative,” Burke says. “I think there’s probably going to be more downside here than people are expecting.”
Some “correctioneers” would certainly welcome a big selloff. But many would probably become panicked if they bought after a 3% correction, only to see the market fall another 3%.
So far, the Dow average (3,241.50 on Thursday) has slipped just 1.5% from its all-time high of 3,290.25 set Tuesday. The broader Standard & Poor’s 500-stock index, however, has already dropped 3.4% from its all-time high set in mid-January.
Of course, the correctioneers might just be right this time around, and a mild selloff could lead to another burst of buying. But with stocks already pushing the outer limits of fair value, another buying explosion would be reminiscent of the last time the correction camp was this full.
In mid-July, 1987, the Investors’ Intelligence poll showed 36.3% of advisers calling for a correction. At that point, the Dow stood at 2,455 after rising steadily from 2,000 at the start of that year. A correction call seemed reasonable.
Instead, the Dow went on another terrific run that August and quickly topped 2,700. The correctioneers finally gave up and poured into the bull camp. By late August, the bulls were at 60.8%, the bears were at 19.2% and the correction camp stood at just 20.0%.
Sadly, the rest is history: The Dow’s peak for 1987 was 2,722.42 in late August, almost exactly at the point that the majority of advisers were wildly bullish. From there, stocks slid until the bottom fell out on Crash Day, Oct. 19, 1987, when the Dow closed at 1,738.74.
Briefly: Is San Fernando High School growing America’s future investment legends? In a contest sponsored by The Times and Merrill Lynch & Co., two San Fernando High teams beat all other participating Southland schools in a stock-picking contest last fall. The winners were honored at a Times lunch this week. The No. 1 team of San Fernando students--who called themselves “3 Stars”--turned a hypothetical $10,000 portfolio into $32,599 in six weeks. The second-place finisher, also from San Fernando, was the “3’s Company” team, which turned their play $10,000 into $19,277. Third place went to the “Los Companeros” team at Corona Elementary School in San Bernardino County, which ended the contest with $15,668. Is this how Warren E. Buffett and Peter Lynch got their starts?
Bull, Bear or Correction? How market sentiment of investment advisors polled by Investors Intelligence newsletter has shifted since the beginning of the year. Figures show percentage of advisors in each camp.
Source: Investors Intelligence/Chartcraft Inc.
