E August Would Be A Wonderful Month For A Market Correction

Stock-market corrections are painful events: they wipe out billions of dollars' worth of wealth and scare neophyte investors out of the market. On the other hand, trees don't grow straight to heaven and the equities market, if it is to remain healthy, needs to take a breather from time to time.

August could be that breather, as seasonality indicates the month as the weakest one historically:

Courtesy: U.S. Global Investors

Not that seasonality has played out consistently in the last several years -- results can get skewed when the President and the Fed chairman are overtly committed to perpetuating the economic expansion. Now that we're in the longest bull run in the history of the American stock market, government jawboning will remain a sine qua non lest reality kick in and valuations actually begin to reflect the economic reality.

In the spirit of charity and good will, I'd like to see a correction that deflates P/E ratios of popular large-cap stocks but doesn't precipitate an out-and-out financial crisis that spills over to the middle class' quality of life. The correction's purpose would be to revert valuations to the mean, creating buying opportunities and starting a new short-term accumulation cycle like we saw in H1 of 2019. Pulling back the chart for a long-range view, it's hard to miss the divergence between stock prices and their regression line, which must always meet sooner or later:

Courtesy: Advisor Perspectives

All I'm saying is, I'd rather see the two lines meet sooner rather than later: let's rip the Band-Aid off quickly and just get it over with. Granted, my motive is rather selfish, as I'd relish the opportunity to grab shares of stocks like Leggett & Platt (LEG), Archer Daniels Midland (ADM), Walgreens (WBA), Southern Company (SO), and Qualcomm (QCOM) at bargain prices.

So yes, I suppose I am feeling a tad sadistic. As they say, you have to break a few eggs to make an omelet...

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Disclosure: David Moadel is not a licensed or registered investment advisor, and has no position in any securities listed herein.

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BreakingBad News 10 months ago Member's comment

We may be there sooner than you may think!

David Moadel 10 months ago Author's comment

You could be right about that... Thank you for the comment BreakingBad News