Correction anxiety boosts talk of next 10% stock drop
By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- After about 28 months without a substantial correction in stocks, some investors are getting antsy trying to time when the next 10% or more drop will occur.
Speculation peaked early this month as the S&P 500 (SPX) pulled back from its mid-January high, lowering the index 6% from that record. Then stocks rebounded in a four-day streak that broke Wednesday. Stock-pickers debated whether we had started the long-awaited market correction -- in technical parlance, a drop of 10% or more -- or even worse, were tipping towards bear territory -- a drop of 20% or more.
The re-emergence of the "scary Dow 1929 stock chart" meme, which overlays stocks before 1929 with the recent market, reflected some of those worries.
While the same chart of the Dow Jones Industrial Average (DJI) adjusted for percent returns filters out a lot of the "scary" aspects, making it look less likely another 1929 crash is the works, the chart has become a poster child for doomsayers noting the next big drop is around the corner.
"So many people have talked about expecting a correction and haven't had one, their position is increasingly untenable and they turn to a position that gives them validation," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
The last time stocks across the board fell more than 10% was back in the summer of 2011 during the debt-ceiling debacle and subsequent S&P downgrade of U.S. debt. As a result, the S&P 500 Index swung down as much as 20% from late July to October before shifting to its current recovery.
The debt ceiling doesn't appear to be a factor in that regard now, given that an extension of the debt-ceiling into March 2015 passed the House and the Senate.