Are the markets going to crash? We don't think so. In fact, the markets are going to put in nice tradable bottom soon. Instead of panicking, astute investors should start compiling a list of stocks they would like to own as their prices come down. The current correction is going to provide investors with a lot of bargains.
2016 will probably be remembered as the most volatile year on record. Our V volatility indicator has surged to yet another high, so extreme volatility is here to stay.
Volatility is not a one-way street; extreme actions should be expected from both ends of the scale. This market has been in a bullish phase for seven years, so if the current correction is viewed in that context, it is not a big deal. This market has covered a helluva of a lot of ground over that time. Every strong bull market has to experience one-to-two strong corrections, and this bull market is not exempt from that rule.
This is the strongest correction the markets have witnessed in a long time if one discounts the rapid correction of August 2015. The August lows are likely to be taken out or at the very least rested again. Hence, the current rally is not expected to last. The Dow could trade to the 16,700-to-16,900 ranges before pulling back.
A test of the August lows or drop to new lows will serve to drive the last bulls out of the market and embolden the bears, and that is when a reversal is most likely to occur. Market sentiment is extremely negative now, and history indicates that Bear markets usually start on a euphoric note. Before this correction started the masses were far from euphoric.
We have been looking at the market volume closely for the past several weeks. We noticed that on down days the volume was significantly lower than on days the market closed in the black. This indicates that the smart money is stepping in and buying instead of selling.
Now is the time to build up a nice list of stocks that you always wanted to own but felt were too expensive to buy. History indicates that the stronger the deviation from the norm, the better the buying opportunity.
This article was prepared by Sol Palha senior analyst at the Tactical Investor an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.