I've been saying for a while that I think a major market correction is likely to happen before too long. My reasoning is pretty simple: We may be seeing some early indications of "economic recovery," but we're still a long way from a new boom. Consider the following:

  • Unemployment is still really high -- 9.8% at the end of September, and I doubt that's changed much in recent weeks.
  • Consumer spending, which has seen a bit of a rebound in recent months, is likely to fade as the effects of the stimulus recede, thanks to that high unemployment rate. Folks (well, most folks) don't tend to buy big-screen TVs and new cars when one of the household's primary earners is out of a job. Low spending means lower sales, which means less manufacturing, which means fewer jobs, which means lower spending ... you get the drift. But it also means ...
  • Lower corporate earnings. Many stocks are trading at big multiples relative to realistic estimates of their near-future earnings. History teaches that big multiples aren't sustainable.

Of course, just because a correction seems warranted doesn't mean it's imminent. As we've all hopefully learned over the past decade or so, the stock market can stay irrational for much longer than we can stay solvent.

But that said, I want to toss out a couple of questions: Is there any way to tell when a correction is imminent? And if there is, what, if anything, should we do as investors when we see it coming?

Can we tell when a big market reversal is coming?
Remember the dark days of early March? When it seemed like every single voice in the media was predicting imminent capital-D Doom for the American economy?

I remember how overwhelming it felt, how certain everyone was, how awful the fear felt. And then I remember thinking: Maybe this is the bottom. If not, it's close enough. I should buy some of the stocks I've been considering right now.

It was the bottom (plus or minus a few days), I did buy, and I made a lot of money. But my point isn't to brag, it's to say this: That was a great example of what happens when market trends change. When everybody is speaking with one voice, it's very possible that they're all about to be wrong.

So when will the next big plunge happen? I can't say for sure, but I'll say this: When the last of the curmudgeons start to get bullish, when the gloom and doom on most of the financial blogs gives way to optimism, when guys like me start writing articles about how good things are going ... look out below.

So what? Market timing is a fool's (not Fool's) game.
Market timing is not something to build your investing strategy around; last I checked, predicting the future wasn't exactly a reliable science. But personally, I find it useful to keep an eye on stuff like this because it helps me think about when to buy (or sell) stocks that I'm inclined to buy (or sell) anyway.

Think it doesn't matter much? Here are some stocks that were good buys in early January, but great buys in early March:

Stock

Value of $10,000
Invested on 1/2/09

Value of $10,000
Invested on 3/9/09

Apple (NASDAQ:AAPL)

$22,312

$24,363

BP (NYSE:BP)

$12,092

$15,870

Costco (NASDAQ:COST)

$10,960

$15,155

Diageo (NYSE:DEO)

$11,320

$15,531

Ford Motor (NYSE:F)

$30,366

$42,931

Johnson & Johnson (NYSE:JNJ)

$10,161

$13,114

Novartis (NYSE:NVS)

$10,753

$14,770

Source: Yahoo! Finance.
Calculations assume investment on the date specified through market close on Oct. 26 and include reinvestment of dividends, if any.

See what I mean? Nobody would tell you that buying Apple or Ford on Jan. 2 was a bad move. It wasn't; it was a very good move. But buying on March 9, when the S&P 500 hit bottom, would have been even better.

Yeah, but ...
Of course, that's a fantastic example of hindsight. Expecting to buy at the absolute low -- or sell at the absolute peak -- is unrealistic. And this is important: The very good trade that you actually make is better than the great one that never quite comes along. You'll find that stocks can (and often do) continue to go roaring off in the wrong direction while you're waiting for the perfect time to buy or sell. And also, there are always values to be had no matter what Mr. Market is doing, and when you find those, the larger market's dynamics should be a minor consideration at best.

The upshot
Still, here's the point I want you to take away: When you're considering any sort of changes to your long-haul portfolio, it can be worth taking Mr. Market's near-term dynamics into account. Always make your decisions to buy (and sell) stocks on fundamentals, not market moves, because that's what drives prices in the long run.

But when you're ready to make that trade, stopping to think about the larger forces at work can sometimes make the difference between a very good investment -- and a great one.

What do you think? Is it bad for a Fool to even talk about market timing? Scroll down to leave a comment and let me know.

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Fool contributor John Rosevear owns shares of Apple, BP, Diageo, and Ford. Apple and Costco are Motley Fool Stock Advisor recommendations. The Fool owns shares of Costco, which is a Motley Fool Inside Value pick. Diageo and Johnson & Johnson are Motley Fool Income Investor recommendations. Novartis is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.