Your Money: One research firm says: Get ready to sell stocks

Posted: November 14, 2013

At least one investment research firm is calling for a correction in the stock market, and advising us to get ready to sell stocks.

That gives us a chance to explain the difference between a "correction" and a "bear market" in equities.

Corrections come in three sizes: small (3 percent to 5 percent), medium (5 percent to 10 percent), and bear market (more than 20 percent).

"Small ones are hard to predict and rebound quickly," said Jean-Yves Dumont, of GaveKal Research, headquartered in New York.

Bear markets are typically characterized by a deteriorating market. Also, a number of indicators signal a transition from bull market to bear market.

We're not there yet, Dumont said. "The good news is that the usual suspects of a bear market are not present," he added.

The bad news is that GaveKal's technical indicators point to a medium-term correction of 5 percent to 10 percent in stocks. Technical indicators are a lot like baseball statistics: Investors use them to measure the health and performance of different markets or stocks, to see which have done well, which are tired, and which might be entering a slump.

Currently, Dumont says, the stocks in the S&P 500 Index, which he watches closely, are exhibiting signals warranting a correction:

"The market is showing signs of exhaustion of the upward trend," Dumont said. "Upside is limited on a short- to medium-term basis, and a correction is likely."

When it comes to sentiment, investors are "overconfident," a sign of market euphoria, Dumont explained.

There is no one formula to predict the top of a market. But in Dumont's view, "the probability of a medium correction has significantly increased. Stocks could tumble 5 percent to 10 percent in the immediate future. My finger is on the sell button."

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