Stocks started broadly higher on Wednesday morning, pushing the S&P 500 (SPX) about 1% higher to 4,341 within the first hour, states Jon Markman, editor of Strategic Advantage.

Then the bottom fell out. It has been clear since last week that bears were pushing the benchmark S&P 500 toward a test of the January 24 lows at 4,222.

The index finished on Wednesday a touch above at 4,225, a decline of 1.8%. With the test of the lows now complete, it is important for bulls to step up. They need to hold 4,222 on a closing basis through the remainder of this week and next.

Success will force bears to begin covering profitable short positions, and a big rally should ensue. There is not any real resistance until 4,460. On the other hand, failure will lead to a waterfall decline to the next critical support level at 4,055.

The Nasdaq Composite (IXIC) dropped 2.6% to 13,037.49 while the Dow Jones Industrial Average (DIJ) was down 1.4% to 33,131, closing near session lows alongside the other benchmarks.

Breadth slightly favored decliners three-one, and there were 1123 new lows vs 71 new highs. Big caps on the new high list included AbbVie (ABBV), Petroleo Brasileiro (PBR), Chunghwa Telecom (CHT), TELUS (TU), and Telefonica Brasil (VIV). That is a super defensive list.

Energy was the only winning sector, while consumer discretionary stocks remained particularly weak. West Texas Intermediate Crude Oil (CL=F) rose 0.5% to $92.35 a barrel. Gold (GC=F) futures were 0.2% higher at $1,910.80 per troy ounce. The 10-year US Treasury yield advanced three basis points to 1.98%.

President Joe Biden unveiled the first package of US sanctions against Russia, targeting two Russian banks and the country's sovereign debt. The UK and the European Union ordered asset freezes and travel bans for certain Russian officials and families. Ukraine called on its citizens to leave Russia.

Australia and Japan have also imposed sanctions on Russia. The sanctions are in response to Russia's formal recognition of Donetsk and Luhansk, two self-proclaimed separatist regions in the east of Ukraine. Ukraine adopted a state of emergency from Thursday.

ABN Amro said in a research note the sanctions so far target Russian banks and officials, along with the trade of the breakaway regions. The analysts do not expect Russia to retaliate by curbing natural gas exports to Europe.

In company news, Palo Alto Networks (PANW) raised guidance after beating fiscal second-quarter estimates. Shares rose 0.4%.…Tesla (TSLA) sank 7%, falling to the lowest level since September, and was the biggest decliner in the S&P 500. The electric vehicles producer is looking to ramp up the output of vehicle parts at its Shanghai factory amid strong export demand, Reuters reported, citing a company document filed with the city government a day earlier.

Correction or Bear Market?

Now that the broad US market has suffered a fast correction, or -10% slide from a recent top, it’s time to determine if possible whether stocks will start to recover or to fall further into a bear market. analysts note that the correction ends the S&P 500’s eleventh longest streak of hanging within 10% of its high. Their research shows that when the index has in the past fallen into a correction following a long stretch of rising or sideways action, it tended to bounce back over the ensuing one to four weeks. However, there were three major exceptions (1962, 1987, and 2020) when sellers refused to give up and pushed the index to double-digit losses in the weeks ahead. Over the medium- to long-term, the S&P 500's returns were about in line with random.

The analysts note that at only 33 days removed from its most recent multi-year high, it seems like this has been a quick about-face among investors. But it's not far below the median number of days it took for the S&P 500 to cycle into a correction.

The S&P 500 tended to bounce after quick corrections as dip-buyers finally found their chance to jump on what had been an excellent trend. Returns after these corrections were better over the medium- to long-term, and well above random, according to the ST study.

However, the big question is how do you know if a correction is going to turn into a bear market, defined as one which falls 20% or more from a recent high.

Chart pattern-wise, the current correction is shaped like ones that did not suffer much more in stock losses. Very roughly, the researchers report that the ones that showed lesser declines than we've seen now, in shorter time periods, tended to see lesser losses going forward.

The analysts then compared those to corrections that did lose more than an additional 10% at some point in the next year. These corrections saw very little in terms of bounces once we reached the correction stage where we are now. The ten most recent show the limited appetite for dip-buying among investors. Sentiment soured once stocks fell into a correction, and only got more sour as short-term rallies fizzled.

Both markets that halted and reversed and those that continued to roll over tended to encounter a short-term bounce lasting one-two weeks at this point, the ST research shows. After that, the bear market corrections fell apart and quickly plumbed lower lows. The non-bear-market corrections only saw some choppiness then went on to recover further in the weeks ahead.

Bottom line from the ST analysts: Now that the most benchmarked index in the world has fallen into correction territory, trumpeted by media headlines, we'll get a chance to see if risk appetite will return. We're in an unhealthy market environment with clear risk-off behavior but only moderate sentiment extremes, so it's not a given that investors will be willing to step up. We'll just have to see how they react in the weeks ahead, and the chart of bear market corrections makes it clear that if investors' risk appetite remains missing and the S&P 500 continues to reach lower lows, it will usher in unpleasant precedents and raise the risk of a full-blown bear market.

Subscribe to Jon Markman's Strategic Advantage here…