So is the correction over already?

02/17/2010 1:33 pm EST


Jim Jubak

Founder and Editor,

So that’s all ya got?

If the much feared correction is over, then investors are still waiting for the kind of 10% correction that normally punctuates a rally.

From the January 19 peak close at 1150.23 to what is so far the bottom at 1056.74 at the close on February 8, the Standard & Poor’s 500 Stock Index was down just 8.13%.

And as of 1 p.m. ET on February 17 the index is up 4% from the February 8 close.

Looking at the action at the end of January and into early February I thought that there was a good chance that the rally would finally suffer a 10% correction. And I thought that, if that happened, it would be a good thing. Rallies need to have corrections to wring out excessive enthusiasm and to bring in new money from the sidelines as investors go bargain hunting. My January 28 post will give you more details on why I thought we were headed for a 10% correction this time and why that might be a good thing.

Now there’s some chance that the rallies of the last few days are related to an absence of news from China because of the week-long New Year holiday that began on February 15.

With China’s financial markets closed, there’s no worrying news on a potential slowdown in China’s economic growth. So I’m not willing to call this correction over until China’s financial markets have been back in business for a week or so. If the return of news flow from China hasn’t sent prices back to where they were on February 8, then I think this correction is probably over.

And it will have ended short of that 10% pain level for the same reason that all the other corrections in the bull market that began in March 2009 have petered out after just a 4% to 5% drop: There’s still an awful lot of money on the sidelines that missed out on the 70% rally off the March bottom and is just waiting for a dip to buy in. The more times that dip is just 5% instead of 10%, the more investors will say “Buy” after a 5% drop, figuring that’s all they’re going to get in the way of an opportunity.

That sets a limit to how bad a correction will be.

On the other hand, if you can remember back just a few days to how nervous everybody was when the S&P 500 was down just 8%, you’ll recognize just how jittery investors are.

I’d call bullish sentiment a mile wide but an inch deep.

If the market continues to go up when China’s markets reopen, investors should start asking themselves a new question: Is this a resumption of the March rally or just a bounce?

I’ve never said 2010 was going to be easy. (See my post “How to worry –and when—in 2010” )
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