This morning, I saw someone tweeting an interesting observation by legendary investor Peter Lynch:
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than in corrections themselves”.
It is a really good reference to many investors’ natural bias to constantly look for some form of mean-reversion in the midst of strong trends. Blind contrarians are a good thing for trends. Every trend needs doubters and skeptics – otherwise there won’t be anyone left to buy.
The last quarter of each positive year is often marked by performance chasing by under-invested money managers. So far in Q4, most of the momentum leaders from the first 3 quarters have not only not outperformed, but have experienced sizable corrections. The best performers since October have been breakouts from several months long ranges. I don’t know about you, but I cannot call this a froth. The market has been very level-headed and it has constantly corrected through sector rotations and pullbacks to major moving averages. The fear of missing out has not been that much bigger than the fear of losing.
It is true that at this particular time, the indexes are a bit technically extended and overbought. It won’t be a surprise to see some form of consolidation through time (sideways) or space (price decline) in the near-term perspective. It might have already started on Friday afternoon – nothing to fret about. It is still a bull market of stocks, where dips are likely to be welcomed as buying opportunities.