Market Correction or Beginning of BEAR?
Since January 19, the markets have displayed noticeable weakness. Is this a market correction or advance warning of a looming BEAR?
Signs of distress:
•Price action is poor. The Dow Jones industrial average has suffered triple-digit losses in four of the past eight trading sessions.
•Selling greets good news. Stocks have been unable to shoot higher on better economic news and a strong start to the fourth-quarter earnings season. Friday’s report of the biggest GDP gain in six years sent the Dow down 53 points to 10,067.
•Fear is on the rise. A closely watched market “fear gauge” has shot up 40%, signalling trepidation on the part of investors.
•January drop is bearish. History has shown that how stocks fare in January (the Standard & Poor’s 500 index fell 3.7%) often signals the trend for the rest of the year.
Stocks also seem to slump every time President Obama, or any other U.S. politician, flogs Wall Street bankers or promotes proposals to reform the financial system. Stocks also shudder any time China makes a move to cool off its white-hot economy or news of debt problems in Europe surface.
But it is not an official correction yet. The S&P is down only 6.6% since its Jan. 19 bull market peak. Still, the sudden softness has Wall Street on edge.
Henry Herrmann, CEO of money manager Waddell & Reed, says a correction has begun. He uses a skydiver analogy to illustrate investors’ inability to precisely predict when stocks will reverse course and head back up. “The first thing you do is step out of the plane, and eventually the parachute opens. The debate now is how long before the parachute opens.”
A pullback now wouldn’t be out of the ordinary, given the S&P 500 has risen as much as 70% in the 326 calendar days since the March 9 bear market low. An analysis of corrections since 1928 by Ned Davis Research shows that there have been 93 of 10% or more and that, on average, they occur every 322 calendar days. So timing-wise, stocks are due for a pause.
But while pullbacks cause angst, they don’t necessarily have to morph into 10% drops. In the five-year bull market that ended in October 2007, the S&P 500 went 1,673 calendar days without a 10% drop — the second-longest pain-free streak, NDR. The no-correction record: 2,553 calendar days from Oct. 11, 1990, to Oct. 9, 1997.
