SPX Correction Looms

From Safehaven.com:

Corrections exist for one reason alone, to rebalance sentiment. Sentiment is simply how traders as a herd happen to feel about the stock markets at any given time. Sentiment swings like a giant pendulum, perpetually oscillating back and forth between its polar extremes of greed and fear. These powerful emotions are finite and self-limiting. The more extreme they grow, the more likely the pendulum is due to swing back in the opposite direction to restore balance.

The physical mechanics of pendulums aptly illustrate the psychological cycles in the stock markets. As a pendulum nears the top of its arc, its momentum gradually slows and then stops. The swing has a limit. And once it starts swinging back in the opposite direction, it accelerates. Though this kinetic energy peaks halfway through its arc, it isn’t fully bled off until the pendulum reaches the opposite extreme.

Stock-market sentiment works the same way. After an episode of extreme greed or fear, sentiment doesn’t just start swinging back and then magically stop mid-swing. Instead it gradually builds momentum that isn’t exhausted until the opposite extreme is finally reached. After episodes of extreme greed, sentiment doesn’t stabilize until we see extreme fear. And this is the main reason why an SPX correction still looms.

Continued

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