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Markets Pulling Back: Context Vs Correction

The Fed statement that the inflation rate was nearing their target rate appeared to be the catalyst for the recent weakness in the market. Argentina default, escalating conflict in Ukraine/Gaza Strip and concerns over slow global growth have had minimal lasting impact on the market. Now we will see how the market digests the oncoming end of easy monetary policy. Will this lead to the oft predicted correction or will this market reaction lead to yet another buy the dip opportunity? Trying to predict a correction is beyond my skill set as I'm positive my track record would be like most who predict 10 corrections for every one that occurs. Instead, let's look at the context of the recent selloff.

The pundits like to state that we haven't seen a "correction" for years. How do we know? One of the blogs I enjoy reading is authored by Josh Brown called The Reformed Broker. He had a post last year entitled: A Field Guide To Stock Market Corrections. Sounds perfect. Josh provides us the common guidelines:

  • Less than 5% market drop = Pause
  • 5% - 10% market drop = Dip
  • 10%+ market drop = Correction
  • 20% market drop = Bear
  • 50% market drop = Crash
  • 80% market drop = Depression

Excellent. Now we have some context so let's look at the recent history. The Dow is frankly irrelevant these days. Instead we'll look at the S&P 500 (Pending:GSPC) and the Nasdaq (IXIC). Here are the pullbacks we've experienced as measured from the high to the low in each cycle:

  • Feb/Mar 2014: GSPC 6.1% IXIC 9.7%
  • CY 2013: GSPC 5.8% IXIC 6.2%
  • CY 2012: GSPC 11.0% IXIC 12.1%
  • CY 2011: GSPC 21.6% IXIC 20.4%
  • CY 2010: GSPC 14.8% IXIC 18.1%

Based upon conventional wallstreet wisdom, we had a correction in 2010, we dropped into a bear market in 2011 (though most now call it a correction), we had a correction in 2012 and we had a dip in 2013. The pullback earlier this year was interesting in that the risk assets got hit pretty hard while the remainder of the market was less impacted. The IXIC was virtually in correction territory and anyone that was invested in biotechnology company got hit even harder...to the tune of 24.7%.

Now we look at the current selloff. The S&P and Nasdaq drops were 3.3% and 3.0% respectively. Is this the start of a correction that is much anticipated and oft predicted? Or is it another dip providing traders another buying opportunity? Beats me, but at least I'll know what to call it when it's over.