Here are all the collected reasons for the fall in the market:
• Just a herd reaction. The recent stockmarket rises have put the Lemmings on the edge of the cliff, some have started to jump and it has set off the rest.
• Inflation concerns. Both here and in the US. A higher oil price is not only driving the calculation of inflation numbers higher but it is now causing price rises in manufactured goods as manufacturers and suppliers factor higher (oil derived) raw material prices and transport costs into the price. Comments from Dallas Federal Reserve Bank President Robert Fisher yesterday saying inflation was nearing the high end of the Fed’s comfort zone was a clear signal that the Fed’s short-term interest rate hikes would continue.
• Higher interest rates. Inflation concerns suggest interest rates will have to rise here and will continue to rise in the US. Bond yields have certainly jumped in Australia and the US in the last month.
• Weak economy. The Institute for Supply Management reported that its non-manufacturing business index in the US surprisingly dropped from 65.0 to 53.3 in August. It suggested the economy is still expanding but has raised the prospect of the next number being below 50, suggesting contraction for the first time in months.
• The US results season starts on Monday and there is some nervousness that the risk to high expectations is on the downside with a few profit warnings coming from US companies in the last couple of weeks.
And what does it mean?
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• The market has now cracked. It will not recover this loss of momentum in a blink. In the March correction, the market fell for two months before bottoming. It suggests traders should still be selling even though prices have already fallen.
• The Energy and Resources stocks, the building stocks and some individual stocks like Macquarie Bank and Babcock & Brown have driven the market rise. A lot of people have thought about selling to take a profit. This correction is their excuse.
• The stocks that have created the most profit in the rise will be the most easily sold in the fall. If you are looking through the portfolio looking for something to sell, look for the stocks that have given you the easiest gains in the shortest period of time. Other people will be quick to sell these stocks if you don’t.
• Confidence stocks suffer the most in a correction. Most traditionally…Biotech, resources, stockmarket stocks.
• For those of us stuck in these confidence stocks there is good news and bad news. The good news is that confidence will return. The bad news is that it’ll take three times as long as it took to lose it.
• Volatility is risk. The market has become a lot more volatile in the last two days. The market is a lot more risky. October is historically the most volatile month for the stockmarket.
• Warren Buffet says we need to be greedy when others are fearful, and fearful when others are greedy, but the truth is this – the height of the market is directly proportional to how many know alls are quoting Warren Buffet. Prediction – you will hear 50% more Warren Buffet quotes for every 5% the market falls.