Market Commentary

What are Corrections?

earnings report

There are two major phases in the movement of stock prices. We call them Bull and Bear markets. In either a long term general trend up or down is established. The phases are generally defined as movements of 20% or higher. These can last for years and sometimes, though rare, decades. The longest Bear market lasted from 1929 to 1953. The longest Bull market lasted from 1990 to 2000 after which the tech bubble burst, throwing us into a 3 year Bear market. From that a Bull phase took over and ran to 2007. The current Bull market started in 2009.

During these long Bull and Bear markets there are corrections. These are moves up or down that generally are defined as about 10%. They restore health to the long market trends. In the current bull market there have been a number of corrections; the flash crash of 2010, when the DOW fell and recovered 1,000 points within an hour, Black Monday of 2011 down 6.7%, Summer Crash of 2015 in August with a fall of more than 10% and the slow selloff of 2016 where the S&P 500 fell 14%. From all these correction the Bull remained intact.

Normal correction of a Bull market can occur at any time. They generally do not last long but they can take months to recover from. This year, 2018, there was a 10% correction in February, from that it took months to recover as the market slowly clawed its way back not exceeding its old high until late September. Then as October began, a month that has a history of being the most volatile, the market began to slide into another correction.

Corrections are normal and are to be expected. They are also health restoring as all the weak hands holding stocks sell in a rush to avoid further losses. Therein lies opportunity. Avoiding corrections or predicting them is in all practical matters impossible. You can recognize over and under valuations of individual stocks, sectors and even the stock market over all, but recognizing exactly when a correction or a Bull or Bear market phase begins is very difficult. It is an effort in futility. Instead of trying to time the market look for value and strength in the stocks you own and when there is a panic where sellers flood out of the stock market, buy, do not be participate in the panic.

Leave a Reply

Your email address will not be published. Required fields are marked *