So far--so far--this is a normal correction. Watch the GDP number on Thursday

10/28/2009 5:54 pm EST


Jim Jubak

Founder and Editor,

I know this is painful.

Stocks, mine in the portfolios and in my own portfolios, are down. And it's starting to feel serious. Stocks have dropped for four trading sessions in a row and for six of the last seven.

Since the decline began, small cap stocks have taken the worst of the beating with the Russell 2000 index down 9.2%.  The damage to the NASDAQ Composite and the Standard & Poor's 500 indexes is less but still substantial at 5.2% and 4.5%, respectively.

But so far this looks like the kind of correction--a drop of 10% or so--that punctuates most rallies. We just haven't had a correction like this in the rally from th March 9 bottom. One of the big criticisms of this rally has been that it's been too far, too fast and that it needed a correction to put in a new base.

Well, your wishes have been granted. This looks like exactly the kind of correction that rally skeptics have been wait for.

So far, though, I don't see any fundamental change in the conditions supporting this rally.

The dollar still looks stuck in a long-term downtrend. That will keep alive the binge of dollar-denominated borrowing that has fueled this rally over the last few months. Economies around the world seem to be in recovery--even the United States is expected to show economic growth in the third quarter GDP numbers that get reported tomorrow. Earnings have easily beaten low expectations in the third quarter.

I still firmly believe that this rally faces a day of reckoning--just not yet. I'm skeptical of any rally built on central banks running their printing presses and I'm not convinced that the various economic stimulus packages produced by governments around the world have created sustainable growth. And I think that a reversal of the dollar carry trade when the Federal Reserve starts to indicate it will raise interest rates could pull the rug out from under both commodities and emerging markets.

But those are problems that I see developing in 2010.

We'll know a lot more about the duration and seriousness of this correction after we see what know the market reacts to Thursday's GDP numbers.




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