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A Stock Market Correction Has Likely Begun, but Have We Seen a Major Top?


Any correction affords investors the opportunity for new buying in favorably rated stocks.

From Andrew Hall,

Every year from November to March, strong lows develop along the Aleutian chain. These systems are the early stages of large open ocean swells that make the north-facing side of the Hawaiian Islands so well known for big waves and big wave riding. The great distance between these two regions allows swells to become more organized and gain strength. On the north-facing side there is a seafloor that more or less rises gradually. This results in slower breaking waves with less of a top to bottom curling effect. When the seafloor rises abruptly, the shoaling process is sped up, leading to a much more intense breaking wave. That is very much the case for the coasts of the Hawaiian Islands, in specific a spot called Jaws on the north shore of Maui. The bottom topography of Jaws shows an abrupt underwater ridge that juts out towards the northwest. This is often the direction from which Aleutian swell arrives, which makes Jaws an ideal large wave receptor. Because the ridge peaks at about 20 feet, Jaws won't break until there is a swell large enough to provide such size. When the conditions are correct, the relationship between Aleutian low pressure systems and the underwater ridge on the north of Maui creates some of the more impressive breaking waves on the planet.

Last month I was reminded of "Surf's Up!" while rereading said report from my departed friend Stan Salvigsen of Comstock Partners fame. While that is the organization Stan, Michael Aronstein, and Charles Minter formed in the late 1980s, Stan's investment career actually began in 1964 as an analyst with the Value Line Investment Survey. Subsequently, he was an equity strategist at a succession of firms, including Dreyfus, Oppenheimer, C. J. Lawrence, and Merrill Lynch. Stan wrote the most engaging, entertaining, colorful, and insightful strategy reports I have read in my 43 years in this business. Select titles of his reports were: "That Ain't Mud on Your Boots Partner," "Revenge of the Nerds," "Homesick," and my favorite, "Surf's Up!" "Surf's Up" showed pictures of a plethora of landside observers watching the few daring surfers willing to brave the 40-foot waves of Waimea Bay (see picture below). Stan likened those surfers to the few investors who had the courage to buy stocks in the summer of 1982 and ride the "big bull waves" that were likely going to occur as short-term interest rates declined from 22%. It was a tempestuous time when my pleas to investors to buy stocks fell on deaf ears as their mantra was, "Why should I buy stocks when I can get 22% in a money market fund?" My response was, "That's exactly why you should buy stocks!" Stan died of a heart attack in 1996 at the tender age of 53 in the office of one of his best friends. He remains a true Wall Street icon and his keen-sighted investment strategy reports are missed by many of us.

I revisit "Surf's Up!" this morning because I think many investors are in the same positions now as they were 31 years ago; they are standing on the beach watching those few brave souls that had the courage to grab a surfboard and paddle out to catch the really big waves, aka buy stocks and ride the "bull waves" that have rolled onto the investment beach since November of last year. Indeed, to ride such waves you need to grab a board and get into the water. Since the beginning of the year I have suggested one way to timidly approach those "bull waves" was to decide how much money you wanted to commit to equities or mutual funds, say $100,000. Then break that amount into four separate pieces and commit the first $25,000 tranche today. Next, determine some point in time where you will buy the second tranche, say six weeks later, irrespective of whether the market is up or down, and so on for the remaining two tranches.
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No positions in stocks mentioned.
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