Since I warned you about the coming 10–13% stock market correction last month, the Australian stock market is down 5.5%. While Aussie punters are feeling the pain, the US market is still making all-time highs.
Unfortunately, the true correction is yet to start.
You may recall that I warned you about the 2014 October stock market correction back in late August. Interestingly, when this happened, the Aussie market pulled back before the US.
So is this round two?
I believe that a correction is a certainty. We haven’t had more than a 10% correction since 2011. Last year’s correction was roughly 9.9%.
We’re witnessing the longest run on record that Dow Jones and S&P 500 haven’t had a 10% correction.
The question is not if the market will correct, but when it will come.
Honestly, no one knows. But the odds of it happening now are greater they’ve been in the past three years. Here’s why…
The spot light is on Greece.
As I told you on 13 February 2015, Greece will default and exit the Eurozone. After hundreds of hours of analysis on this story, I believe that it could happen as soon as next month. If not then, September is the best bet.
I’ve outlined what should happen to financial markets (bonds, stocks, currencies and commodities) to Resource Speculator readers. I’ve also given them two scenarios — a June and September default. Both will see different reactions from the markets. If you’re interested in learning about this exclusive research, see here.
There’s more to this correction story.
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Over the other side of the Atlantic, the US economy is booming — at least, according to the San Francisco Federal Reserve…
The US economy grew a dismal 0.2% in first quarter of this year — down from the 2014 annual average of 2.2%. Here’s where it gets interesting…
The Federal Reserve of San Francisco recently came out, explaining why this was the case. Apparently, the data wasn’t sufficiently seasonally adjusted. If it was, it would have shown that the US economy grew ‘substantially stronger’ than the government reported last month.
Indeed, ‘cooking the books’ works. The San Francisco Fed said that GDP growth should have been 1.8%, instead of the ‘dismal’ 0.2% reported in the first quarter. No wonder these comments sent the stock market lower on Wednesday — investors must have seen through the smoke and mirrors.
Yet, the Wall Street Journal came out a day prior to the revision:
‘The minutes from the April 28-29 meeting of the Fed’s policy-setting committee also showed most participants expected the U.S. economy to pick up pace after a slowdown in the first quarter and that labor market conditions would improve.
‘But Fed officials flagged a number of concerns weighing on the central bank, including disappointment that falling oil prices did not spur consumer spending as much as had been hoped. They also cited economic worries in China and Greece.’
I beg to differ…
Thanks to the San Francisco Fed, we (apparently) know that that the US economy didn’t slow in the first quarter of this year.
Adding to this: crude oil prices are higher, the US stock market is hitting all-time highs, China’s stock market is in bubble territory, and the US economy added 223,000 jobs in April…seeing the unemployment rate fall.
As I’ve been telling Resource Speculator subscribers for months, get ready for a US interest rate hike in either June or September. This will impact stocks.
The mainstream is calling the Fed’s interest rate rise rumour a bluff. But take note, this looks a lot like the situation in 1994. During that year, US rates also rose against expectation.
Back then, longer term bond yields rose, while the stock market stayed flat for months. When long term rates rise later this year, stocks should decline.
Investors have been brainwashed by the mainstream media to believe that higher rates will see lower stock prices. When rates rise later this year, many will sell in panic…worrying that the stock market has peaked.
Here’s a tip. When the rest of the herd panics, remain calm.
Contrary to what the mainstream tells you, the stock market always rises with higher interest rates… following the initial frightened sell-off by the masses. The stock market rose, when the US Fed raised interest rates from 1994 to 2000 (peak of the tech bubble) and from 2004 into 2007 (peak of the stock market pre-GFC).
As such, you should see this correction as a major buying opportunity! But what will this correction look like?
Have a look at the chart below. It tracks the Dow Jones Industrial Index. Each bar represents one week.
Source: Resource Speculator; Freestockcharts.com
Click to enlarge
There’s large uncertainty surrounding markets over the coming months. However, some technical targets can help provide you with a clearer picture on where we are heading.
We have the potential to head to the top blue line. This resistance level stands at around 18,650 points. This resistance line dates back to the market top in 2011, before the last major correction started to be felt.
Looking at the downside…
A weekly closing this week on the Dow Jones below 17,963 points will signal a correction is likely to happen. From here, a weekly close below 17,618 points next month would confirm a correction is in progress. This target is shown by the middle blue trend line. The last time we broke this trend line was October 2014. As you can see, that correction was swift.
If this level is broken, I’d expect to see the market head down to the 16,300 point support region. This is shown by the lower blue line. So get ready for a 10–13% correction. When that happens, the mainstream news headlines will be calling for a 50% correction.
Again, don’t panic. They have no idea.
Even during a correction period, there’s still one avenue to build wealth. I’m talking about the speculative end of the stock market. Resource Speculator readers have plenty of quality speculative stocks on their radar. To find out more, see here.
Resources Analyst, Resource Speculator