Perhaps the more important question is whether this latest market correction is the start of a new bear market or is just a dip in a continuing bull market. If this is the start of a new bear market, we face many more months of downward market action and we should take advantage of the recent upticks to bail out. But if this is just a correction in a bull market, then most of the damage is probably over and selling would insure buying back in at a higher price in a few weeks.

I strongly believe that what we are experiencing is a normal bull market downturn and that we will soon see the market return to its recent highs. I’ll explain some of my reasoning later, but I can illustrate the situation better with a chart.

This shows the daily price activity of the S&P 500 over the past two years. Although it was difficult to see at the time, the market bottomed in April of 2005 and has been in a pretty good uptrend since then. I’ve marked the major downturns with red arrows. Since spring of 2005, we’ve seen only two significant corrections until this latest decline. The first was in October 2005. It was a very sharp drop, much like we’ve just experienced. But it was a “V” bottom and within a month the S&P had recouped all of its losses.

The next decline began in May 2006. Once again the initial drop was very steep. Initially it appeared that it might be over quickly, because stocks rallied after the first steep fall. But then there was another decline and the S&P 500 ended up making a double bottom. This turned out to be the most significant correction since 2002. And while it was certainly unpleasant at the time, the second bottom occurred only about nine weeks after the initial fall. Then it took only about eight weeks for the index to climb back to its prior high.

By way of further dissection, I’ve marked a couple more spots during that correction. Let’s say an investor during last summer’s correction bailed out at Point A after the index recovered some of its losses. Then that investor bought back in at Point B when the S&P 500 crossed back above its 50-day moving average (the gold line). Even with such great timing, that investor gained very little. The additional decline experienced after Point A had been erased just a month later.

The point I’m trying to make is that after years of study, research and personally watching the markets, I’m convinced that the most powerful indicator that exists is a trend. And in spite of the recent correction, I believe the longer-term uptrend of stocks remains intact. In that case, the worst part of this correction is probably over. The chance that the market reached its 2007 peak in February is pretty low. So investors who hang tight and ride out this painful blemish should soon be rewarded with higher highs.

As for the question posed by the headline for this article, investors with money on the sidelines should probably get ready to buy on any down days. It is certainly a better time to buy than it was two weeks ago!

There are many reasons to believe that the bull market trend is intact. Foremost is the fact that the U.S. economy remains strong. Unemployment remains low. Long-term interest rates are low. Inflation is low. The housing market has declined, but the nationwide collapse that many predicted seems more and more unlikely. Oil prices seem to have achieved a measure of stability.

The bottom line: hold your long positions. There is little point in selling when most of the damage is done. And if you have un-invested cash, this could well prove to be a great time to put it to work in the market.
F.S.