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The S&P [^GSPC:SNP] has not seen a 10% correction in 589 days. That’s been a good thing for buyers of stocks, but as the markets head into the end of January and into February, even the most bullish must be getting concerned.

Bears need not apply

Last year the bears didn’t fare very well. The Fed’s $85 billion a month in bond purchases has supplied unending liquidity. Despite the Fed threats of more tapers to come, the S&P 500 [ESH14:CME] continues to trade within 1% of its all-time contract high.

But this year may not be as easy as last year for the S&P — with a full 11+ months left, the bears are quietly waiting for their opportunity.

Last corrections

(click to enlarge)

According to David Bianco, S&P 500 corrections of 10% or more, including those that turn into bear markets, have happened every 1.5 years or 357 trading days on average since 1957.

According to MrTopStep.com the last 10% correction occurred in the summer of 2011 and while “severe” and close to a bear market, the correction fell 1% short of being considered a real bear market: down 19%.

Corrections not as frequent as they used to be

S&P 500 traders love a good decline.The history of the S&P back in the old days and even today is that the “locals” in the pit are there just because they are waiting for that one big down day. Many locals who were in the pit in the 1987 crash made millions of dollars, and some are still dreaming of a repeat.

There have been many instances of big declines since then, the most notable after ‘87 was the 1999-2000 tech bubble and the most recent the credit crisis. What traders need to understand is that the STD is way higher than the mean.

Corrections are much more rare over the last 25 years vs. the last 50 years. From 1990 to 1997 the market avoided a 10% decline, only getting close in 1994. We also saw no 10% corrections from April 2003 to September 2007. So 4 years without a correction is very possible provided inflation and interest rates stay low and earnings continue to climb.

Other things are not what they used to be, either. Program and algorithmic trading make up over 65% of the daily volumes, and while program trading may have been blamed for the ’87 crash and 2010 had the flash crash, somehow we just don’t think it’s that far out to think a 10% in 2014 won’t happen. Computers can be reprogrammed, after all. We’ve learned a thing or two about runaway algorithms since 2010.

The Asian markets closed mostly higher (Shanghai Comp +2.16%) and in Europe 10 out of 12 markets are trading lower. Today’s economic and earnings schedule starts with the MBA purchase applications number, Redbook, 4-week T-bill auction and earnings from United Tech (NYSE:UTX), Norfolk Southern (NYSE:NSC), eBay (NASDAQ:EBAY), Netflix (NASDAQ:MFLX), Motorola Solutions (NYSE:MSI), Abbott Labs (NYSE:ABT), US Bancorp (NYSE:SB), Northern Trust (NASDAQ:NTRS), Raymond James (NYSE:RJF), and Ethan Allen (NYSEARCA:RTH).

Our view

Up and down and all around but still no S&P 1850. We heard there were sellers around for yesterday’s open but little did we know the ESH14 was going to run all the sell stops from 1831 down to 1826.

One of the traders in the MrTopStep trading room emailed me saying the 1826-1828 was a big level to hold on a retracement from last Wednesday’s 1846.75 high. He thought the level had to be tested before going back up. All we know is the S&P does not hold big gap-ups very well.

That said, it’s already Wednesday and according to the Stock Trader’s Almanac today is a bullish day. We lean to selling the early rally and buying weakness.

As always, please keep an eye on the 10-handle rule and please use stops when trading futures and options.

  • In Asia, 8 of 11 markets closed higher: Shanghai Comp. +2.16%, Hang Seng +0.25%, Nikkei +0.16%%
  • In Europe, markets aremixed: DAX +0.07%, FTSE -0.02%
  • Morning headline: “Nasdaq Continues to Outperform the Dow and S&P”
  • Total volume: 1.32M ESH14 and 5.8K SPH14 traded
  • S&P Fair Value: 1837.65 (0.85 above futures)
  • Economic calendar: MBA purchase applications number, Redbook, 4-week T-bill auction and earnings from United Tech, Norfolk Southern, eBay, Netflix, Motorola Solutions, Abbott Labs, US Bancorp, Northern Trust, Raymond James, and Ethan Allen
    • E-mini S&P 5001836.25-2.25 - -0.12%
    • Crude98.55-0.22 - -0.22%
    • Shanghai Composite0.00N/A - N/A
    • Hang Seng23082.25+49.131 - +0.21%
    • Nikkei 22515820.96+25 - +0.16%
    • DAX9719.16-10.96 - -0.11%
    • FTSE 1006830.41-3.85 - -0.06%
    • Euro1.3558

     S&P 500: 589 days since last 10% correction

Source: S&P 500: 589 Days Since Last 10% Correction