Yesterday was the biggest down day for the Dow Jones since July, and the 4th down day in a row for the S&P 500. Both the Dow Jones and the S&P 500 are sitting just above their 50 day moving averages while QQQ sliced beneath 50 day on Tuesday. The S&P 500 made a slightly lower low meaning that the trend has changed.
Earlier this year the S&P 500 began correcting in early April and found a bottom on the first of June. This correction eroded more than 9.5% from the index. Should we expect another 10% decline? Or is a pullback of 5% more likely?
Average Frequency of Market Corrections
- 5%: 3 Times Per Year
- 10%: Once Per Year
- 20%: Once Every 3.5 Years
Since we’ve already seen a correction (or near correction) this year of ~10%, should we instead be looking for a more shallow pullback? I think so. The current pullback has shaved almost 3% from the S&P 500. We can shave another 2% or more and still be watching completely normal market action. In fact, due to the low volatility of 2012, I’m not sure we’ve seen 3 instances of a 5% pullback yet this year.
My indicators are pointing towards an immediate bounce, but I do not think the bounce will be sustained. Instead, I’m looking for another lower low and some consolidation around the 50 day moving average. I do not think we will see much more than 2-3% downside from Wednesday’s close.