News & Insights
The sharp declines and sharp recoveries in the stock market this past week were emotionally draining for many investors. The main beneficiaries from the significant increase in volatility over the last few weeks were the financial media. Given the positive fundamentals and market environment we described in our note last week, we still see this as a “market event” and not the beginning of a bear market. Importantly, we can assure you that we are continuously reviewing our trusted indicators and data to evaluate our market views.
What do corrections “look” like?
In studying corrections historically, we look at them in terms of magnitude and duration (peak to trough). A few observations to note:
- The average correction (which is defined as a 10% decline from the most recent high) lasts 188 days and total decline is 13.87%.
- The three shortest corrections lasted 18, 20 and 28 days.
- The larger the percentage decline, the longer it takes to bottom.
- For corrections with a below-average price decline, the duration is 86 days, whereas for above-average price declines, the peak to trough is 156 days.
Anatomy of a Market Correction (S&P 500)
Even those unfamiliar with technical analysis can see the simple patterns – corrections typically start with a sharp decline, a “bounce,” and then either a new low over the coming months or, at the very least, a “retest” of the previous low. Technical analysis/charting provides signals about investor psychology, which, in our view, is what drives markets over the short term. Let’s dig deeper into each “move”:
- Initial low: Markets go through a “shock and awe” scenario where prices decline rapidly.
- Bounce: Investors see prices 5-10% cheaper than a few days or few weeks ago, begin to buy because there is a “sale.”
- New low/testing the low: Prices decline rapidly, usually resulting in an environment where selling is exhausted – everyone who wants to get out sells. There are two causes of the secondary low/testing the low:
- Investors that see the correction as the start to a bear market and upon prices rising, take the opportunity to “get out” and sell into the temporary strength.
- Market volatility does not subside quickly in markets (it lingers!) and the elevated levels of volatility create anxiety, which typically results in a declining market.
- Ultimate low: Objective long-term investors conclude that the correction is not the beginning of a bear market, but simply a transitory market event. Buying ensues, but due to the selling exhaustion mentioned previously, the buyers are more urgent than the sellers, so prices rise quickly. Optimism breeds more optimism and, eventually, prices continue to rise in a self-reinforcing loop.
So – where are we now? In our view, the recent recovery from midday Friday may not represent the final low. The intraday low on Friday did not produce the exhaustive selling spike/buying surge that is consistent with an ultimate low and subsequent recovery. Additionally, as shown in the above data regarding past corrections, if the low was made Friday, it would be the shortest correction in over 50 years. We see more sideways trading and potential for continued volatility in the near term. However, as we had mentioned last week, this correction is within the environment of a growing economy so we do see this as a “normal” correction within a bull market.
Source for all data: Bloomberg
GIS is a team of investment professionals registered with HighTower Securities, LLC, member FINRA & HighTower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.
HighTower Advisors is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.
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All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.