What a Correction Will Look Like While a bear market might not be imminent, would anyone be surprised if the market took a sudden sharp drop? By BEN LEVISOHN Sept. 9, 2017 12:04 a.m. ET Getty Images Maybe it’s the lingering effects of last week’s cover story on bear markets (“How This Bull Market Will End,” Sept. 1), but I have corrections on the mind. While a bear market, defined as a drop of 20% or more, might not be imminent, would anyone be surprised if the market took a sudden sharp drop—the kind we saw in August 2015, when the S&P 500 dropped 12% on concerns about China’s currency devaluation, or the 12% decline that greeted the start of 2016? We’re certainly overdue for something. Since the start of 2010, the S&P 500 suffered drops of at least 10% in every year except 2013 and 2014, according to Strategas Research Partners, and even in those years it had drops of 6% and 7%, respectively. This year, the biggest peak-to-trough decline has been about 3%. No wonder I feel the need to look over my shoulder. The good news: When a correction comes—and it will come—it’s likely to be a buying opportunity as long as the economy continues to hold up. It isn’t just the market’s lack of progress—the S&P 500 has gained just 1% over the past three months—or the headlines that have us worried that a setback could be in the offing. Technical indicators used by some of our favorite investors are also pointing to a potential setback. For instance, the Leuthold Group’s Major Trend Index registered a neutral reading on Aug. 11 after a 13-month bullish streak. “We believe this bull market still has legs,” Leuthold’s Doug Ramsey wrote to clients last week. “But so too might the minicorrection that’s hit mainly the secondary stocks thus far.” What will a correction look like? To state the obvious: It will start with something smaller, like a drop below the S&P 500’s 200-day moving average. It has traded above that trend indicator for 303 days, only the 15th streak of at least 300 days since 1937, according to Bespoke Investment Group data. Some streaks last far longer—the S&P 500 traded above its 200-day moving average for 627 days in a streak that ended in May 1956—but others ended shortly after hitting the 300-day mark. 2004’s streak ended at 313 days. And it wouldn’t even take a correction to get the S&P 500 to drop below its 200-day moving average, as the S&P 500 closed on Friday just 4% above the metric. Such a break, however, doesn’t usually signal the end for a bull market. While the S&P 500 has dropped 0.9% on average during the week following such a fall, it has gained 1.1% on average during the following month. “A break below the 200-day will likely be accompanied by weakness in the very near term, but nothing more than that,” says Bespoke Investment Group co-founder Paul Hickey. And if the selloff morphs into a correction? Since 1989, the S&P 500 has suffered drops of 10% or more 11 times without a recession or bear market, with an average tumble of 14.2% lasting 2.4 months, according to Strategas Research Partners’ Nicholas Bohnsack. Yet it didn’t take the market too long to make back those losses once a bottom was reached. The S&P 500 followed those declines by rallying 16.5% during the following three months, Bohnsack says. Stocks with high shareholder yields, strong profit margins, and high returns on invested capital or equity have outperformed during corrections, Bohnsack notes, while the market’s more volatile and heavily shorted names have underperformed. He created a list of companies that meet characteristics that should outperform during a pullback, one that’s heavy on tech names likeApple(ticker: AAPL) andMicrosoft(MSFT), as well as health-care companies likeJohnson & Johnson(JNJ) andAmgen(AMGN). Amgen in particular looks interesting. Last Thursday, it released positive results from a Phase 2 study on its antimigraine treatment Aimovig, data that helped send the stock up 1.3% that day. But it isn’t just the fundamentals that make Amgen look interesting. It trades at just 14.5 times 12-month forward earnings, well below the S&P 500’s 18 times. And last week it closed at $180.64, the third time this year it has closed near its all-time high of $182.66. The last two times, Amgen was rebuffed. Could the third time be a charm? http://www.barrons.com/articles/what-a-correction-will-look-like-1504929848
I wouldn't say it'll be a simple drop. I'm going to go by the playbook, the drop has to start slow and end slow. It cannot begin fast because mom and pop will sell, you need them to stay inside the market in order for you to manufacture your gains. Slow, slow, slow and then bang. Your FA can't convince you to stay in the market anymore so you sell.... sixty days later a historic bull market begins. Interestingly, the availability of credit hasn't changed in a hundred years, yet there's only one in ten thousand that can understand it.