US stock indices struggling to stay above this level
Day to day price action suggests that US stock indices are struggling to hold on to a 10% level off 52-week high. This level is associated with correction. At 20%, it’s bear market. In absolute terms, this correction is horrid. It dwarfs ‘Black Monday’ on August 24, 2015. Delusion or meaningful?
I like this article ‘Stock Market Corrections Versus Crashes And How to Protect Yourself‘.
First it tells us that 10% is the magic number that separates healthy correction from reversal. Next it says
A stock market correction is when the market falls 10 percent from its 52-week high. Wise investors welcome it. A pullback allows the market to consolidate before going toward higher highs. Each of the bull markets in the last 40 years has had a correction. It’s a natural part of the market cycle. Corrections can occur in any asset class.
I don’t know if DJ30 will stay above 10%. So far it is holding just above although it did overshoot below. I do totally agree that wise investors welcome corrections.
So far DJ30 had a very good time – there was no meaningful correction since 2016. Normal markets move in zigzag manner. Corrections are driven by profit taking. Healthy corrections are opportunities for money on the sidelines to enter. Think of corrections as a discount. Wise investors don’t want to enter markets at all-time high. They only take action when there is an incentive for taking risk.
It looks like there is some effort by DJ30 at stay above the 10% mark. Look at the price action on this chart. This is how I would describe the price action – over the last 5 trading days, bears were not able to close the index below 10% correction mark in a meaningful manner.
This chart doesn’t say that DJ30 crash below today, tomorrow or any day after. It offers some cold consolation that if you are an investor who is now torn by anxiety, you are not alone; there is some force struggling to hold the index up from further losses. It also says that whichever bear thinks that DJ30 should crash mightily, please give a second thought before you go all-in because the defence is still hanging on if rather grim.
This is SPX500 chart doing the same. NAS100 is also hovering at the 10% mark.
This chart shows DJ30 enjoying a boom period in 2017 where there is little to none meaningful correction – even mainstream media was threatening the world with North Korea’s missiles. Why so? Market became complacent, de-sensitised to risk or they thought they would be rescued every single time by the Plunge Protection Team.
I do not take treat this 10% ‘correction’ casually and no one else should. In absolute terms, this 10% correction dwarfs the August 24 ‘Black Monday‘ in 2015. I was caught in this kind of predicament before. It’s gut wrenching. For some, it could mean a total portfolio destruction. So reminder: 1) don’t lose sight of risk management and 2) rallies don’t go on forever.
Please take a look at this 9-point crash guide for bulls and bears.