Current Correction May Get Deeper

03/14/2007 12:00 am EST

Focus:

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo's Insiders Plus, is concerned that investors have dismissed the market's correction and aren't prepared for a real bear market or recession.

Given the big, uninterrupted run-up in the market since last July, [the recent] plunge is not surprising. Nor is it alarming in itself. My concern is that it may mask a much larger and longer-term drop. The lead story in Barron's [a couple of weeks ago said] this is just a blip. The big market mavens predict it will be over soon.

This kind of mentality usually occurs at market tops. At bottoms, everyone laments that the end of the world is nigh. Still, this has been a very unpredictable market; so, there's no way to be sure of anything. Many technical indicators that had good predictive ability in the past were utterly useless this past year. In fact, some were a hindrance.

The same held true of many fundamental indicators. The National Home Builders Index, based on past patterns, predicted a stock market crash about six months ago. It hasn't happened yet. Will it? My guess is that manipulation of the money supply, since the Federal Reserve stopped disclosing M-3 figures, has delayed and distorted normal patterns.

In addition, the greatly expanded role of international finance in our monetary affairs has made the game much more complex than in the past. Patterns that formerly progressed from A to B to C are no longer doing so, lockstep, because new factors are exerting their influence.

Asia's addiction to the greenback is the most obvious new wrinkle. China in particular seems to have a very strong tolerance for accepting depreciating dollars because they keep its factories going, avoiding political unrest. I suspect it won't be pretty, but that the denouement will take longer than we might think. That's how market forces usually work.

If what we're seeing is a 10%, or even a 15% correction, there's no reason to do anything. We can wait out a bad quarter or two. Buying opportunities are already starting to present themselves, although I'm not ready to pull the trigger for any big new buys yet.

What could be painful is if we have the kind of 40% market slide typically seen in recessions. With the Fed already facing inflation pressures, it would have a hard time opposing that scenario by its normal method of lowering interest rates. It could take over a year to recover.

Despite these apprehensions, I see no point in selling any of our current holdings. With all the new variables in play now, it's harder than ever [to time the market]. So, it makes sense to stick with what we own, and ride out the rough patch.

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