Market correction is fast approaching

CNBC COMMENT

SO THERE’LL be no Cyprus exit from the Eurozone. At least not for now. But its bailout comes at a hefty price. Société Générale says the country’s real GDP could contract by 20 per cent by 2017 – a truly depression-era statistic.

But even before the late night deal was put together in Brussels, financial markets had been relatively sanguine about the course of events. It was never about Cyprus per se, but more about the implications. Investors decided correctly that the history of the Eurozone crisis suggested a deal would be done, however onerous, to keep the single currency with 17 members. Last week equity markets across Europe were down between just 1 and 1.5 per cent.

Now with Easter looming and the end of the quarter approaching, there appears to be little event risk to worry about. Trading will be thin and we’ll be keeping an eye on Italy as centre-left leader Pier Luigi Bersani tries to form a government. Thankfully, stock investors have plenty of central bank liquidity to keep things ticking over.

For the second quarter, the main question may be whether history is going to repeat itself. As Piers Curran from Amplify pointed out on my programme, in the last three years the biggest correction of the year has come after the first half high was reached between now and the end of April.

In 2010, the high was posted at the end of April, followed by an 18 per cent correction in the S&P 500. In 2011, the first half high was again in April, followed by a 22 per cent correction. And last year the high for the US markets was posted at the end of March, followed by an 11 per cent correction.

Following the gains this year, it might take a brave individual to say we won’t see a repeat of these patterns. But if we do, the risks are probably a lot less significant. Curran reckons this means at most a 5 per cent pullback in the S&P, with a slight risk of a maximum 10 per cent. In price terms this equates to a level of around 1,470, and if that is breached a floor of 1,400 on the US index.

The implications for investors are that, if you’re not in stocks, this phase of the rally is too long to jump on. If you believe history is likely to repeat itself, it may be worth waiting for the summer and investing in cyclical stocks to the end of 2013. Aside from politics, the biggest risk in that time is the Federal Reserve exiting its super loose policy earlier than expected. If it does, it will be because growth is better and that might still benefit the US dollar.

Ross Westgate co-presents CNBC’s Worldwide Exchange. Follow Ross on Twitter @rosswestgate