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A correction in time
Super Contributor

A correction in time

There are two ways a market corrects, either in price or in time.

A price correction such as we saw in 2008/9 is generally aggressive and quick and often referred to as a crash if it is severe enough.

A correction in time is what we have experienced over the last three years. The Top40 closed last Friday at levels it first in the second quarter of 2014 and the same level it has crossed over twenty times since then. In other words, the index has gone nowhere in three years.

Yet over that period the earnings of these stocks have increased 30%-40%. Not an annualised increase, total increase over the three years.

Put another way with earnings up say 30% and the price the same we have an index that is 30% cheaper – a correction in time.

Now after a correction (be it price or time) the market then stats moving higher again, but a time correction often takes longer compared to a price correction as the latter is easier to see as prices are much lower and price is the key metric in any market.

Putting all this together my Top40 call for 2017 was bullish and I am still expecting a break up rather than down. Now sure cabinet shuffles and downgrades are the worry but the Brazilian market rallied strongly after downgrades and impeachments in 2015 and foreigners are happy buying our bonds. We just need to wait for them to start buying our equities.Top40 weekly to close 23 June 2014Top40 weekly to close 23 June 2014

 

Simon

3 Comments
Senior Member

Interesting point about time correction. What does that say about efficient market theory? The information is available yet the price does not move. 

Super Contributor

@Arian

well the market is no that efficient over shorter terms (and three years s short). Ultimately is reflects underlying values.

 

I think it driven by fear and also moving parts. NPN is up some 110% in the last three years, other down overall flat. So in part it people shifting their money around but no new money (we can see this as foreign investors been net sellers last 18 months).

Senior Member

Shiller points out that an inefficient market can prevail for some time when keen investors bid up the price of a favoured share. In this circumstance those not invested in the share cannot correct it if they feel it is over-priced because they do not have shares to sell and hence reduce the price. The only action they can take is to short the share but that typically provides only a limited opportunity. As an example a  number of internet shares are probably priced too high due to investor exuberance.