The talk about a 10% correction

Last week many analysts predicted that we are in for a 10% correction and that it is almost imminent. But that already meant there would not be a 10% correction. If most people expects a 10% “correction” that means people estimate that stocks will drop by 10%, reach a bottom and a fair value, and then slowly start moving upwards. Logically if they expected that after a 10% drop there will be further downward movement towards what they estimate to be the fair value (or the technical floor) they would be predicting something more than a 10% correction, perhaps a 12% correction, or 15% correction, etc. Implicitly the broad market was considering anything more than a 10% as a clear oversell territory that would be highly unlikely and possibly a strong buy.

So in this situation the logic of anticipating what the others expect (the market is all about anticipating the anticipations based in turn on anticipations) would dictate that once stocks fall by around 7-8% traders will start buying. After all, why wait for the 10% percent when everybody else, knowing others’ expectations, would start buying. Is it not better to stay ahead of the market and buy on the cheap before everybody else.

This is not to say that volatility will not come back. It certainly will and possibly will freak out a lot of traders and investors. But there will not be a 10% correction when everybody expects a 10% correction.

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