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"Healthy corrections"

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June 07, 2013 – Comments (8)

Often times I here somebody say something like "the market needs a correction to fuel itself for the next leg up"

This to me makes no sense.  I get that corrections are very welcome, to give discounts in order to load up on stocks that have gotten overpriced"....but why would a stock need to come down in order to keep going up?  Why would a lack of a correction be detrimental to a stock? I get thst stocks DONT go up forever withotu a correction...but why does a stock inherently need to pull back in  order for it to go up  in the future? 

8 Comments – Post Your Own

#1) On June 07, 2013 at 12:03 PM, L0RDZ (78.50) wrote:

It  doesn't  make sense  to  me  either,  but  what  can  I  do  other  than  shrug my  shoulders  and  roll  my eyes  and  try  to  come up with  some  bs  as  to  why.

I've  read  somewhere that  rather  than  seeking  truth,  to  instead  seek  to  find  the  pleasure  in  lies.

Sometimes  the  things  we  need to  believe in  are  things  that  aren't necessarily  based  in  truths  or  the  truth.

That  people  are basically  good.

That good  always  triumphs  over  evil.

That  honor  ~  courage ~  &  virtue   trumps  power &  money.

Lastly

That  true  love  never  dies.

Anyways  rather  than  try to  find  sense  in such a  concept  as  healthy corrections  as  opposed  to say  unhealthy ones,  I'll simply  seek  something else  to  distract me  and  hopefully make  me  forget as to why I  responded  in  the first place ?

LOL

SIncerely,

Lord

Z

 

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#2) On June 07, 2013 at 6:24 PM, awallejr (75.87) wrote:

Well as a trader, he wouldn't really care unless he is trying to time a trade.  But an investor has a different viewpoint.  As an investor I would much rather see my stock go 3 steps forward, 1 step back, than just go parabolic. 

Since I mainly buy for the long-term I want sustainability.  Corrections allow for new people to jump in.  But if the stock is going parabolic, new money would be too scared to chase and odds are that stock would eventually crash since markets have a tendency of overshooting.

With computers things seem to last days instead of months.  I was asking for a 5-7% correction and we got it quickly.  S&P peaked at 1687 and fell to about 1598 before it resumed back up.  That is why I warned you when you said you were shorting to take quick profits.  Hope you did.

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#3) On June 08, 2013 at 1:32 PM, Valyooo (99.48) wrote:

I covered half my short within .03% of the bottom and the other half yesterday morning. 

 

I disagree though that new money is scared to chase parabolas. How do you think the stock goes parabolic? From new money pushing it higher.  

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#4) On June 08, 2013 at 2:13 PM, awallejr (75.87) wrote:

What I meant by new money is coming from investors.  Those parabolic moves are often being chased by momentum traders, who are quick to pull out as they are to push up.  That leads to what I would call an "unhealthy" correction since it tends to cause panics and scare away new investors.

During this latest run-up before the correction you constantly heard fund managers saying they are waiting for a correction before committing new funds. Even your friend Cramer would constantly say "wait for a pullback before buying."

Sometimes I "create" my own potential pullbacks by selling  puts on a stock I want but want to pay for it at a lower cost. If it does correct I got to own it at a discount.  If it doesn't correct I keep the premium and can rinse repeat.

 

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#5) On June 09, 2013 at 4:25 PM, Valyooo (99.48) wrote:

Of course wait for a pullback before buying. But I am ok with my stocks going up everyday

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#6) On June 10, 2013 at 12:46 PM, Frankydontfailme (27.90) wrote:

Corrections, healthy or otherwise, can be explained by technical analaysis. An equilibrium between buyers and sellers is reached at each price, only to be adjusted until a new equilibrium is reached (at a lower price in this case).

In a normal market there is therefore a mix of buyers and sellers. A price that continues to rise parabollically must reach a lower price equillibrium or else everyone in the world would have to own the stock on margin (all buyers and no sellers).

These fluctuation occur independetly and cannot be explained by fundamental analysis - the price to earnings and roe and such. So don't hurt your head over it if you insist on sticking to the fundamentals. 

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#7) On June 10, 2013 at 1:15 PM, Valyooo (99.48) wrote:

In a normal market there is therefore a mix of buyers and sellers. A price that continues to rise parabollically must reach a lower price equillibrium or else everyone in the world would have to own the stock on margin (all buyers and no sellers).

That is not true at all.  If I stepped in and said "I will pay $600 for AAPL" somebody could sell it to me.  Then lets say nobody else wants to sell AAPL until it gets bid up on 1 share of volume to $650, then it changes hands at that price.  This can go up to hundreds of percent higher.  Buying on margin is uneccesary.

 

This blog has nothing to do with technical analysis or why corrections happen, which are pretty obvious.  The point was, if I owned a stock and bought it at $20, and it parabolically rose to $200, I wouldnt start freaking out and going "omg, my stock has risen too much, its probably going to be worth $0 soon!".  I of course would sell because it would be likely overpriced soon....but I would be much happier selling at $200 and taking a huge profit, then having it take 10 years to get there and having corrections the whole time...I don't think a parabolic move higher should make the company worth LESS, and that healthy corrections make the company worth MORE.  To me, that is illogical.  Buy low, sell high, duh, but a parabolic move upward should not mean that the stock will crash to a much lower price then if it has a series of "healthy" corrections on the way there. 

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#8) On June 10, 2013 at 1:41 PM, Frankydontfailme (27.90) wrote:

OK

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