US Stock Market Update: Get Ready For A Market Correction

| March 19, 2012 | 0 Comments

I know it sounds crazy.  Saying the market is primed for a fall feels a lot like saying the sun won't rise tomorrow.  But maybe that's precisely why it's time to get prepared now for a market correction.

The market has been screaming higher since early October.

The Dow Jones Industrials have gained over 2,400 points or more than 22% since then.  And the Nasdaq Composite is over 659 points higher… an amazing 27% gain in a little over five months' time.

What's even more amazing?

The Dow is now trading above 13,000.  A level last seen in December 2007 when the financial crisis was just unfolding.  And the Nasdaq has eclipsed its pre-financial crisis highs, soaring above the lofty 3,000 point mark.

It's starting to feel like the market can't do anything but keep going up.

And that's the first sign it's time to exercise a little caution.

But that's not the only reason.  There are several things happening right now that could combine to provide a strong headwind to further market gains.

The first is skyrocketing gas prices.

The price for a gallon of gas in the US surged by 6% in February. According to AAA, Americans are now paying more than $3.80 a gallon on average across the country.  And based on the current level of gasoline futures, retail prices should average $4.00 a gallon very soon.

High gas prices are clearly bad for the economy.

The more money we have to spend to fill up the tank… the less we have to spend on other items.  This doesn't bode well for companies selling products or services to the American consumer.

Another red flag is the surprising drop in corporate earnings growth.

Profits at America's largest companies grew by just 6% in the final quarter of 2011.  That's pretty weak in and of itself.  And if you strip out huge gains at Apple (AAPL) and AIG (AIG), earnings for S&P 500 companies grew by an anemic 1.2%.

That ended a run of eight straight quarters with double-digit percentage earnings growth.

Clearly, an ominous sign…

In fact, market analysts are now calling for an earnings decline in the first quarter of 2012.  According to FactSet, earnings at S&P 500 companies are expected to drop by 0.5%.  And if you take out the projected 50% increase in Apple's earnings, the drop widens to a shocking 2%.

It's hard to see how the market will keep moving higher as company after company reports a drop in first quarter earnings.

And let's not forget about the impact of a European recession.

While not in recession yet, Europe is already halfway there.

A recession is defined as two consecutive quarters of economic contraction.  The Euro Zone economy shrank by 0.3% in the fourth quarter of 2011.  And it looks like it will contract again in the first quarter of this year.

What's more, the European Commission now predicts the Euro Zone's economy will contract by 0.3% for all of 2012.

Even a mild recession in Europe will have a big impact on American companies.  Data from the European Union shows Europe accounts for about 22% of US exports.  That translates to roughly 2.7% of GDP.

It's hard to imagine how US companies will make up for a drop in exports to Europe this year.

No question about it, the high-flying US market faces significant headwinds going forward.  While the market has continued to make new highs despite these hurdles, it's just a matter of time now before unbridled optimism turns to healthy pessimism.

So, how should you prepare for the coming correction?

The best thing to do is to place trailing stops behind your short-term trading positions.  Trailing stops allow you to stay in the market and capture any further upside.  More importantly, they'll protect you to some degree when the market correction begins.

The key is to take steps now to protect your hard earned profits.

You don't want to wait for the correction to start.  That's like shutting the barn door after the horses have already escaped.  By then, you will have already lost a good portion of your recent gains.

A little planning now will serve you well when the coming market correction unfolds.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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