Trader’s Narrative

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: