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The S&P 500 is currently in the middle or near the end of the sub-phase 1 of the long-term Phase 3 of the bull market since 2009, according to Stephan Albrech, CEO of Albrech & Cie. Asset Management from Cologne. This phase is expected to be followed by a significant correction, as suggested by certain warning patterns.
The correction could result in a decline of 10 percent, with a worst-case scenario of 20 percent. These patterns include shrinking market breadth, deteriorating market participation as seen in the Advance-Decline Line, lack of confirmation from economically sensitive sectors such as Small Caps, Transportation, and Semiconductor sectors, and unusual volatility patterns like the VIX rising in tandem with the index rather than falling. These signals have historically preceded notable pullbacks.
Investors should be prepared for this correction given these rare but important signals. The advised reaction is to remain patient and avoid panic selling, as corrections have been followed by rebounds if investments are held through the downturn. In fact, if history repeats or rhymes, increasing equity allocation during the correction is unlikely to be regretted.
More specifically, the market breadth is narrowing despite record highs, and key sectors are not confirming the index's breakout, suggesting fragility. The VIX rising alongside the S&P 500 signals expected volatility that often precedes turns. Investors should monitor key external factors such as Fed policy, tariff deadlines, and earnings sustainability which may catalyse corrections or recovery.
It may be wiser, depending on risk profile, to increase equity allocation to optimally benefit from the upcoming Phase 3. The S&P 500's Phase 3, following the correction, is predicted to be the strongest phase within the strongest overall Phase 3 of the bull market since 2009. The indices now have much more "oomph" upwards compared to the start of the bull market in 2009.
Investors should focus on leading sectors like AI and semiconductor stocks, which currently drive the bull market. Holding through volatility tends to yield positive long-term returns rather than attempting to time market tops or bottoms.
The S&P 500's Phase 2, which ranged from the fall of 2018 to the spring of 2020, had the shape of a megaphone with higher highs and lower lows. The Phase 1, which began out of desperation, ended in the fall of 2018. It would be reckless to sell stocks impulsively during the correction.
In summary, the expected pattern for a correction includes deteriorating participation indices, divergence in sector performance, and rising volatility. Investors are best advised to maintain a long-term perspective, avoid reacting emotionally to short-term swings, and consider the resilience of leadership sectors in their portfolio strategy.
Other sectors, such as AI and semiconductor stocks, might offer potential for investing during the correction and the subsequent Phase 3 of the bull market. However, it's advised to be cautious in increasing equity allocation, considering one's risk profile, as the correction could result in a decline of up to 20 percent.
