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Like most tough times in your life, an overdue correction always goes on longer than you want. It’s like a diet that works but takes more time than you want. But what I liked about Friday’s trading on the local stock market was that we dropped 0.89% on the S&P/ASX 200 index, while the Dow Jones was down over 4% at the time of writing this article.

And if it ends in negative territory overnight, it could be the worst week for stocks in nine years. The S&P 500 index is only down about 5% for the week, before the end of trading on the last day of the week. However, since 26 January, it’s down over 11% so it’s had its correction.

However, the market players, who are in control (hedge fund managers and short-sellers aided and abetted by desperate investors running for the exit doors), won’t let long-term investors off the hook yet, though I think next week will bring in the buyers because hedge fund managers know value when they see it.

This whole week of what I’ve called “madness and craziness” is really only a legitimate adjustment process on Wall Street. Big market influencers expected three, maybe four, rate rises this year and a moderate growth of inflation. Now, after great economic readings for employment and wages in the US, the new thoughts are four, maybe five, rate rises this year. That’s a big change for those tipping only three rate rises who now think five is possible.

So what’s going on here?

We made our top on the S&P/ASX 200 index on 9 January, hitting 6135. So we’re only down 4.84%, which makes prefect sense given how the Dow was up something like 25% last year, while we rose 7%.

The S&P 500 index in January hit its 10th consecutive monthly gain, the longest streak in 59 years but a correction was way overdue, as I’ve said many times in this Report.

In contrast, we don’t need a correction but I guess it could come if the Yanks go too far with this market slump. I’ll be surprised if this drags on for too long. Why?

This week, Citi’s research team looked at 18 indicators that can flash buy or sell stocks. “Good news is our checklist shows that only 3.5/18 factors are flashing SELL compared to 17.5/18 in 2000 [the dotcom crash] and 13/18 in 2007 [the GFC crash].” Citi strategists said. “So our bear market checklist says it is too early to call the end of this bull market.”

These guys are right but we’ll have to deal with some scary volatile times in the age of computer-trading and exotic investment products that need to be looked at by regulators before it’s too late.

“The market is focused on higher interest rates right now,” said Kate Warne, investment strategist at Edward Jones on CNBC. “The underlying fundamentals are going to drive stocks higher, but I think the path higher will be more volatile than it’s been in the past few years.”

I totally agree, especially when you throw in how well the US and global economic recovery is and the fact that 78% of US companies have beaten expectations with earnings this reporting season. And the next season is expected to be even better!

So let’s have a look at what’s here over the week. For headline-makers, it was the worst week for two years. Our losses for the week were 4.6%, so there were more scary headlines than there were actual huge losses for investors.

And wrapped up in this black cloud that has poured on to our stock market this week is the value of the Oz dollar, which this morning is 77.83 US cents. At the start of February, we were above 81 US cents and tipsters were telling us to hold our breath for an 84 US cents dollar!

This week, ANZ revised its interest rate call to predict no rate rises this year and the RBA boss Phil Lowe added to this “no rate rise this year” talk on Thursday by saying that the Bank doesn’t expect core inflation to climb into its 2-3% target range before the middle of next year.

That said, for those who believe a strong economy delivers better profits and stock prices, he did say “unemployment will fall faster than it – the RBA – forecast three months ago.”

Most of us hate periods like this, unless you were either shorting the market or out of favour stocks, but I can’t be convinced that the Citi team is wrong with their 18 indicator test, which says we are still in stock-buying territory.

What I’ve expected this year was that we would see our market play catch up with the Yanks because we are so far behind. That said, I do respect this observation of Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, who said to CNBC: “I think this bull market is basically in the process of forming a top. This is the first crack of it.”

The question for us to answer is: how long does it take to form a top, where the next move is the first phase of a bear market? And that’s my watching brief going forward.

What I liked

• The Reserve Bank has made no changes to forecasts for economic growth and underlying inflation. (Love the growth story but would prefer more inflation.)
• The Australian Industry Group Performance of Construction index rose by 1.5 points to 54.3 in January. Any reading above 50 signifies expansion or growth of activity.
• Construction wages rose by 0.4 points to 64.3 in January – above the 12-month average of 63.4.
• The weekly ANZ/Roy Morgan consumer confidence rating rose by 1.5% last week. The short-term outlook for the economy is the most positive since November 2010.
• The ISM services index in the US rose from 56.0 to a 12½-year high of 59.9 in January (forecast 56.5). Any reading above 50 signifies expansion of the services sector.
• Job advertisements rebounded strongly in January, rising by 6.2% to 177,961 ads, after falling by a downwardly-revised 2.7% in December (previously reported as -2.3%). It was the strongest monthly lift in ads in almost eight years. Job ads are up by 13.8% on a year ago and are at 6½-year highs.
• The Australian Industry Group (AiG) Australian Performance of Services Index (PSI) rose by 2.9 points to 54.9 in January – the eleventh consecutive month of expansion.
• US Consumer sentiment rose from 94.4 to 95.7 in January.

What I didn’t like

• The Wall Street reaction to great jobs and wages data in the USA. A sell off was understandable but, as per usual, stock markets take it too far!
• Global oil prices fell to a one-month low on Wednesday after US data showed an unexpected increase in refined products. Stock markets tend to move in the same direction of oil prices nowadays for a variety of reasons.
• The Living Cost Index of wage-earning households rose by 0.7% in the December quarter, above the consumer price index of 0.6%. Annual living costs’ growth accelerated to 2%, up from 1.5% in the September quarter – the strongest pace of growth in 3½ years.
• Retail trade fell by 0.5% in December after increasing by an upwardly-revised 1.3% in November (previously 1.2%) – the strongest outcome in eight years. Annual sales growth decelerated to 2.5% from 2.9%. (I like to see January sales figures before I make my call on retail.)

One BIG dislike

I hate watching the Dow going into the close when there’s fear and loathing connected to a correction because hi-tech, computerized investment products, created to deal with volatility, are making stock markets temporarily crazy. Watching the Dow go from down 600 to down 1600 in a matter of minutes on Tuesday morning showed that regulators have to look at what algorithmic trading and exotic investment products do to the orderly operation of stock markets. Regulators ignored the problems with sub-prime loans, collateralised debt obligations and credit ratings agencies, which created a ‘little’ problem called the GFC as well as the USA’s Great Recession!

As George Santayana counselled us: “Those who cannot remember the past are condemned to repeat it.”

So when does this “healthy correction” (as Shane Oliver called it this week) end? I suspect it will be next week some time but US companies will have to really impress to help their stock market head higher to any significant magnitude.

By the way, when I got up this morning, the Dow was down 444 points. And by the time I sent this to be proofed, the Dow was down 17 points and the S&P 500 was up! Where Wall Street ends this morning our time is anyone’s guess but a positive finish would be a nice sign.

(On Monday, I’ll tell you how I’m playing this current volatility.)

The Week in Review:

• I share with you how I invest and make money. My strategy is revealed!
• Paul Rickard takes a look at our Model Portfolios after they beat the index in January with positive outer performance.
• Interim earnings season is underway and James Dunn looked at what is in store for reporting season.
• With all this tremor in the market at the moment, Charlie Aitken said that there is “opportunity in volatility”.
• And Tony Featherstone shared with us 4 stocks to buy on a correction. Bargain hunters who hold their nerve will be better off he says!
• It’s a tough industry but the savvy investor might still be able to find value within the market and Roger Montgomery milks it with these 3 dairy queens.
• Financials may be out of favour, but that doesn’t mean there isn’t value to be found. ANZ has appeal in our Hot Stocks this week.
• In the first Buy, Hold, Sell – What the brokers say, brokers are busy preparing for the half-year reporting season with upgrades for ASX and JB Hi-Fi
• And in the second Buy, Hold, Sell – What the brokers say, Magellan, Macquarie and Shopping Centres Australasia were all upgraded this week
• Cleanaway Waste Management was featured in this week’s Professionals Pick after their solid management team has turned the company around.
• Plus, in this week’s Questions of the Week we answer readers’ queries about bond-like investments and whether or not the banks are really in trouble.

 Top Stocks – how they fared:

What moved the market?

• Wall Street gyrations!
• With the US dollar firming, oil and commodity prices took a hit.
• The RBA has left the official cash rate on hold at a record low of 1.5% at its first meeting of the year. Business conditions were positive and the outlook for non-mining investment had improved, while increased public infrastructure investment was also supporting the economy.

Calls of the week:

“This stock market sell-off will become a buying opportunity” – Peter Switzer

Goldman Sachs warns that most Cryptocurrencies will hit zero

The Daily Telegraph’s call to out Deputy PM Barnaby Joyce.

The Week Ahead:

Australia

• Monday February 12 – Credit & debit card lending (December)
• Tuesday February 13 – NAB business survey (January)
• Tuesday February 13 – Lending finance (December)
• Tuesday February 13 – Speech by Reserve Bank official
• Wednesday February 14 – Consumer confidence (February)
• Thursday February 15 – Employment/Unemployment (January)
• Friday February 16 – Speech by Reserve Bank official

Overseas

• Monday February 12 – US Monthly budget (January)
• Wednesday February 14 – US Consumer prices (January)
• Wednesday February 14 – US Retail sales (January)
• Thursday February 15 – US Producer prices (January)
• Thursday February 15 – US Industrial production (January)
• Thursday February 15 – US Philadelphia Fed survey (February)
• Friday February 16 – US Export & import prices (January)
• Friday February 16 – US Housing starts (January)

Food for thought:

“If you give people a good enough ‘why’, they will always figure out the ‘how’.” – Jordan Belfort

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Charts of the week:

Source: Commsec

Top 5 most clicked:

1. How do I invest and make money? My strategy revealed!– Peter Switzer
2. 4 stocks to buy on a correction– Tony Featherstone
3. The opportunity in volatility– Charlie Aitken
4. Buy, Hold, Sell – what the brokers say– Rudi Filapek-Vandyck
5. Milk it with these 3 dairy queens– Roger Montgomery

Recent Switzer Super Reports:

Monday 5^th February: Stick to your guns

Thursday 8^th February: Keep calm and carry on

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.