We're Due For a Good 10% Correction

 |  Includes: DIA, QQQ, SPY
by: Mario Rizzi

Newsflash – the market is now in a correction. Expect to see 12,500 on the Dow shortly. But you can also expect a speedy snap-back. This is normal – this is common – this is necessary.

Those last lines pretty much summarize exactly what is happening, and will happen over the course of the next few months. Using the S&P 500 index as evidence, we can clearly see that we are due for a short term correction, and reading the headlines in any newspaper, we can see that the market conditions are right to facilitate this downturn. Pull up a historical chart of the S&P 500 and you will see exactly what I mean.

Every 5 to 10 years, without fail - bear market or bull market - we have a nice 10% to 20% drop. You can blame whatever factors you want, be it war, stagflation, Asian bank crisis… in the end the reason actually holds little significance. Who cares why it happens, sometimes there’s no apparent reason at all… but it does happen.

Now for the history lesson.

During the bear market from 1965 to 1980, the S&P 500 return was essentially zero. Yet the chart looks like a roller coaster. In 1966, the index fell from 91 in April to 76 in September, a 16% drop in 5 months. We had another massive drop in 1970, and an even greater fall in 1974. Yet after each of these corrections, the market rebounded almost 50% higher within 2 years.

In 1980, from February to March, we dropped of 20%. In fact, that bear market only really snapped in August 1982, after a huge correction all the way back to 102 point on the S&P – off a previous high of 141 (almost 40%!).

Remember the crash of 1987 – a 33% fall. In 1990 we fell 20% from July to October, only to rally back by February. In 1997 we dropped 9% in March alone. In 1998 from July to September we dropped 18%, but again rallied back by year end.

From 2000, onward.

Forget the bear market of a few years ago, I don’t even want to go there. But, since then, in 2004 there was correction of 6% in the first 3 weeks of March. Another 6.5% drop in March 2005, and then again in February 2007 we dropped over 5%.

The crash of 2007?

If you think about it, since 2003 we have yet to have a good 10% correction. We are absolutely due, and the stage seems set especially with the credit problems, high oil prices and hedge fund concerns. We are already off significantly since our highs of July. With just a little bit more to tip the scales, we should probably see at least another 5% fall, bringing the S&P 500 to 1375, with the Dow likely dipping to about 12 500. Mind you, I don’t expect this to be a drawn out occasion. We recently hit a Dow Jones high on July 19th, and we are already down substantially.

We may well bottom within a few weeks, at most a couple of months. And as history would suggest, we will likely rally right back by the end of the year. Funny how things work, but you can pull up the historical charts and check for yourself.