Guide to Market Corrections – Part 1

With the recent market pullbacks, I have compiled info from many sources for a “Guide to Market Corrections.” I hear many terms for when the market has profit taking. These are the terms I feel are the most accurate.

A percentage drop of less than 5 percent is what I call a consolidation. From 5 to 9.9 percent is a dip. An official correction happens with a drop of 10 percent. When the market drops 20 percent from its previous high, it is then an official bear market. A 50% drop is a crash while some classify an 80 percent drop as a depression, something I hope we never experience-but should be prepared for if we do!

  • Since the end of World War II (1945), there have been 27 corrections of 10% or more, versus only 12 full-blown bear markets (with losses of 20 percent, plus).
  • This equates to one correction roughly every 20 months, according to Dow Jones index guru John Prestbo. Prestbo points out that this average does not mean they’re evenly spaced out. Over the last 66 years 25% occurred during the 1970′s, another 20 percent occurred during the secular bear market of 2000-10.
  • The average decline during these 27 episodes has been 13.3 percent, and each has taken an average of 71 days to play out (just over three months).
  • From the beginning of the last secular bull market in 1982 through the 1987 crash, there was just one correction of 10 percent or more. Between the Crash of 1987 and the secular bull market’s peak in March 2000, there were just two corrections, according to Ed Yardeni. This means that secular bull markets can run for a long time without a lot of drama.
  • Since the stock market’s bottom in March 2009, there have been only 3 corrections. In the spring of 2010, the S&P 500 began a 69-day drop of roughly 16 percent. The widely referenced summer correction of 2011 lasted for about 154 days and almost became a bear market. The correction during the spring of 2012 set up one of the greatest rallies of all time, although it was barely a real correction, sporting a peak-to-trough drop of just 9.9% in fewer than 60 days.

Next week, I will cover additional facts on corrections and will end with my advice on how to deal with the next one coming our way!

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