Search This Blog

Search Tool

Mar 29, 2018

INVESTOPEDIA - 5 Stock Corrections Show More Pain Ahead on March 29, 2018.

Since reaching a record high on January 26, the S&P 500 Index (SPX) has given investors a bumpy ride, mostly to the downside. First there was a 10.2% correction lasting through February 8. Since then, after various ups and downs, the index closed March 28 at 9.3% below that January 26 high water mark. What next? If recent history is a guide, stocks have a longer downward ride ahead. The average correction since 2009 has sent the index down by 14% to its trough, and almost 200 days elapsed before the previous high was regained, Bloomberg reports. While the recent decline in stock prices may be disconcerting to some investors, it is still not a bear market, which requires a drop of at least 20%.

'Very Stressful Stuff'

"This is very stressful stuff," said Michael Purves, chief global strategist at Weeden & Co., in remarks to Bloomberg. He continued, referring to the attitudes of investors who've gotten used to an almost uninterrupted climb in stock prices from Election Day 2016 to January 26, 2018: "It's like going to the gym and lifting weights after you haven't been to the gym for two years. Part of it is just a very normal psychological, emotional reaction."

Read more: 5 Stock Corrections Show More Pain Ahead | Investopedia
Julian Emanuel, chief equity and derivatives strategist at BTIG LLC, agrees. He told Bloomberg: "So much of the money was directed toward tech stocks, and there is a much greater emotional identification for investors in these household names. People are incrementally more agitated than they were during February's leg down because everyone believed the coast was clear. People are optimistic by nature, so when corrections hit, they are largely unexpected and emotionally jarring."

Recent Corrections

As Bloomberg defines it, a correction ends when the previous market peak has been regained. Using this methodology, just under 200 days was the average duration of the four corrections after 2009 but prior to 2018. Using this convention, the longest of these corrections lasted 417 days, from May 2015 to July 2016, per Bloomberg. Additionally, since the record high reached on January 26 has yet to be regained, the market is still in a correction according to Bloomberg's definition, just 61 days old through March 28.
A more common way to look at the duration of corrections is just to measure the length of time to the trough from the previous peak. According to this methodology, those four previous post-2009 corrections lasted an average of 106 days, with the longest being 157 days in 2011, per Yardeni Reseach Inc. They also arrive at a slightly higher average decline of 15%. The correction earlier this year lasted only 13 days by this measurement standard.

Buying Opportunity?

The big unknown is whether the current downturn in stock prices has much more to go, and, if so, for how long. Strategists at Wells Fargo & Co. and JPMorgan Chase & Co. are among those who believe that the bull market still has some legs, and they are advising their clients to buy on the dips. (For more, see also: Why You Should Buy the Sell-Off.)
A widely followed set of indicators developed by Bank of America Merrill Lynch is increasingly pointing towards an upcoming bear market. However, as this forecasting tool stands right now, it suggests that a bear market is still about two years off into the future. Accordingly, strategists at that firm are advising clients to stay in equities for now, though perhaps at lower levels of exposure.
Meanwhile, a model used by Goldman Sachs Group Inc. indicates that a bear market already is underway. However, that firm's strategists believe that anomalies in the data are producing a spurious reading, and they advise investors to remain calm. (For more, see also: The Bear Market Isn't Here Yet.)

Bear Market Underway, or Not?

To be sure, while the 2018 correction is only halfway to a genuine bear market, technical analysts see evidence of a bear market that is fast approaching, if not already underway, in their charts. In fact, longtime market commentator Mark Hulbert is convinced that a bear market has begun. On the bright side, he cites history indicating that it takes, on average, just a little over three years from the onset of a bear market to a complete recouping of all losses.
The bulls are unfazed, pointing to strong fundamentals, as the economy and corporate earnings continue to grow. Also, they bank on the fact that true bear markets typically accompany recessions, and one is not yet on the horizon. (For more, see also: Why the Stock Market Is Poised for a Major Breakdown.)

Read more: 5 Stock Corrections Show More Pain Ahead | Investopedia

Want to Learn to Trade Options Like a Day Trader?

Options can fit a range of investing goals whether it's maximizing your exposure or helping to minimize your risk. If you want to learn everything you need to know about trading them, then sign up for our free 8-week email course. Twice a week you'll receive an email that will take you from not knowing what an option is, to how you can trade them within your brokerage account. So sign up for free and start learning how you can add options to your investing toolkit.
Related Articles
  1. Investing

    Why a 10% Stock Drop Will Feel Like a Bear Market to Investors

    Spoiled rich: Many investors are psychologically unprepared to deal with a long-overdue correction.
  2. The key to using active funds: Setting client expectations

    Prepare clients for active fund volatility
  3. Investing

    Charles Schwab: 4 Things Many Investors Get Wrong About Corrections

    In terms of gauging when a stock market correction is over, there's a lot of misconceptions out there, says Charles Schwab's Kleintop.
  4. Investing

    Why Severe 19% Correction Could Happen Like 1998

    This year has much in common with 1998, when techs led the market down by 19% in a few weeks.
  5. Investing

    Why a Stock Market Correction May Lead to Overreaction

    Today's investors, complacent from low volatility and soaring indexes, may overreact to a correction.
  6. Investing

    Stock Investors Should Fasten Seat Belts for More Plunges

    Brace for more big stock price declines in the upcoming months, several market strategists warn.
  7. Investing

    An Economic 'Shock' Could Derail the Bull Market

    Fast global economic growth has propelled the bull market. When growth stalls and reverses, watch out.
  8. Investing

    Adapt To A Bear Market

    Learn how your portfolio should evolve to suit bear market conditions.
  9. Investing

    Why the Stock Market Is Poised for a Major Breakdown

    After stocks endured their biggest weekly drop in over 2 years, technical analysts see more downside ahead.
  10. Investing

    Is a Stock Market Correction Imminent?

    Some insiders say signs point to another correction in the market in the weeks or months to come.
  11. Investing

    Bear Market Mutual Funds Are Attracting Investors (BEARX, GRZZX)

    Bear funds take short positions on the market and profit when prices go down.