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Why This Market Correction May Have a Way to Go

Maria Sovago, special to CNBC.com
Tuesday, 5 Feb 2013 | 6:38 AM ET

Investors should brace for a pullback in equity markets and should book profits now, Stewart Richardson, chief investment officer at RMG Wealth Management said on Tuesday.

"The correction we've seen that started last week or yesterday got more legs on the downside, maybe 5 to 10 percent," Richardson told CNBC Europe's "Squawk Box".

According to Richardson, we have got to the point where everyone is pleased, and it is time to book some profits and move to the sidelines.

"Almost without exception now the sentiment indicators are either consistent with where they've been at previous market highs for the last two or three years, during the risk-on-risk-off periods; some of them at record highs or consistent with 2007, prior to the big bear market," Richardson said.


Market Is Over Bought: CIO
Stewart Richardson, CIO at RMG Wealth Management, tells CNBC they are on the sidelines as they are predicting a 5 to ten percent market correction.

"So for us, the sentiment is now a real red flag for the bulls."

Jim O'Neill, Chairman of Goldman Sachs Asset Management agreed markets could pull back further.

"The underlying momentum for the year is still very favorable. But could we correct further? Quite easily," he said.

"The scale of the rally that we have seen in January means that you got to ask those types of questions, because nothing goes in a straight line, as we have found out yesterday," he said.

He added however that there was significant evidence that the economy was improving. "There's one or two warning signs, but against that there is clear evidence of things doing better around the world," he said.

Richardson argued that the good news is already priced into the markets. "The market got expensive, certainly overloved in terms of sentiment," said

RMG Wealth Management turned bearish last week by buying put options, and got more defensive against last week's high, by hedging long equities with active volatility strategies, to protect the portfolio when things get really bad, the CIO said.

"It's very cheap to buy downside exposure now," added Richardson.

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