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Another Bull Market Correction? at Trader’s Narrative




Another Bull Market Correction?


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During this most recent bull market we’ve had four major corrections. On average they have pulled the market down about 8%. The fifth is still ongoing so no one knows how it will turn out.

Perhaps Jeremy Grantham’s theory will be proven to be correct. Or perhaps it will be just another correction within a secular bull market. I’m trying to remain agnostic and unemotional.

This Time Is Different?
I’m assuming that we are witnessing a fifth correction and my reasoning is that it makes sense to continue doing what works, until it doesn’t. If you buy every correction in a bull market you’ll be wrong once - at the top. I’d rather have the market prove me wrong and deduct that tuition from me than to automatically think “This time it is different.”

So far this most recent correction has exceeded not only the average of the previous corrections (-7.8%) but also the deepest one (-8.8%). As of yesterday’s close, we have seen a -9.6% correction, which by the traditional definition of a correction is barely adequate.

Theoretically we could correct another 10% with the bull surviving. But like little rich kids, we’ve been spoiled with these relatively shallow pullbacks (see graph below). What worries me the most is that we are dripping lower slowly and not falling throught the floor.

Brother Can You Spare Some Capitulation?
Sentiment is probably to blame as there is still no capitulation. We saw the put call ratio spike up but then even after yesterday’s severe market decline the equity only put call ratio came down slightly (from 1.08 to 1.05). That is troubling. On the plus side the ISEE sentiment did fall double digits but it still is not in the 50-60 range that I’d like to see.

Here’s a graph of the bull market corrections:

market corrections during bull market

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6 Responses to “Another Bull Market Correction?”  

  1. 1 Keith Shepard

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    “I’m assuming that we are witnessing a fifth correction and my reasoning is that it makes sense to continue doing what works, until it doesn’t. If you buy every correction in a bull market you’ll be wrong once - at the top. I’d rather have the market prove me wrong and deduct that tuition from me than to automatically think “This time it is different.” ”

    —-

    You make a very good point (from the quote above). That’s definitely something to keep in mind. Though for me, I don’t buy on dips. I’ve always waited until I see the beginnings of an upward trend.

    Setting aside market statistics and looking at pure price patterns only, I really don’t seem much upward encouragement yet (sans a cover rally). We may just enter a phase like we did in 2004 (sideways grinding, slightly downward) as the credit fears wring themselves out of the market.

    Or we could have a mini crash like we did October 27, 1997.

  2. 2 Aaron

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    I think it is rather likely that this is indeed just a correction in the middle of a bull market, but it certainly is shaping up to be the biggest one yet. There may be some more on the downside for the rest of the summer, but I would think that this fall should see a rally at least by November.

  3. 3 Babak

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    Keith, I leg into the downturn. How do you define or know there is an uptrend? just eyeball it?

    Aaron, I suspect seasonality will come into play… especially if the Fed wakes up and shaves a quarter point off the interest rate.

  4. 4 Keith Shepard

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    No, I don’t eyeball it really. I keep my analysis of the broader market pretty simple by watching volume and a couple moving averages … waiting for a thrust up and a test of the initial pullback, support or resistance. Just basics. In the spirit of Stan Weinstein.

    I’m just not a believer in buying dips for the sake of a dip. I’m not saying I’m right; just that I generally don’t find them appealing. I’d rather everyone bottom pick and begin pushing the market forward raising OBV, price, testing key levels, etc…

    I’m happy getting a piece of the pie … even if it’s third to the last and has a couple of hairs in it.

    But as I said, you made an excellent point: why quit what has been working? Buying the dips (or corrections) in this bull market has paid well … plus, you were the first person I read (or even heard) that mentioned the 10% level. I should keep track of those statistics, but I never got into the habit. Price hypnotizes me sometimes and I get a bit pig-headed.

  5. 5 Keith Shepard

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    Admittedly, buying a Fed Rate cut dip and not waiting for the trend to sat in … is very profitable.

  1. 1 Sentiment Overview For Week Of August 24th 2007


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