Collapse... or Correction? The Answer Might Surprise You

Ready to suck on a tailpipe yet?

I mean, stocks just suffered a 10% correction this week – 10%.

All I can say is, “Don’t do it, man!”

And today I’m going to show you why this correction might not be as bad as you think. I’m also going to show you the market metric we have to keep a close eye on now…

Look, I know everyone’s on suicide watch after this week’s market downturn. But that’s only because they’ve forgotten what a real correction feels like. Bull markets tend to reward bad behavior. You can hang onto crappy stocks when you shouldn’t—and you still might make money. Not anymore.

Stocks drop 10%… and everyone loses their mind.

“Since 1946, there have been 31 instances of a 10% drop. But a 10% drop doesn’t necessarily lead to a 20% one (which denotes a bear market) — in fact, in just 12 of those 31 instances did a bear market eventually ensue,” MarketWatch reminds us. “If anything, the reason the current drop seems bigger is that it comes after a 47-month period without a 10% correction — the third longest such span in market history.”

Think about that for a second. You just experienced 47 months where the market didn’t offer up a 10% correction. That’s incredible. And now that stocks are moving lower, you might feel some discomfort.

But the Dow just snapped a 6-day losing streak with a 600-point rally. So nothing to worry about, right?

Well, not exactly.

Sure, yesterday’s bounce was impressive. But from our perch, the damage has been done. It could take a while for this market to snap back to attention. What you need to watch right now is how the market reacts to the lows established during the October 2014 pullback.

Take a look of the S&P:

Searching for a Bottom

I see a couple of scenarios playing out here:

First, if stocks manage to keep their heads above their October lows, we could very well see a tradable bounce after some indecisive chop. While I don’t think the market will jet back to new highs as if nothing happened, stocks could stabilize and give you a chance to strategically place some meaningful trades as the market sorts itself out. Simple…

Then there’s option “B”. If the major averages can’t hold their October lows, we could very well see another leg lower. That would make the bounce we saw yesterday the beginnings of a bear flag, in which the market alleviates its oversold condition before once again seeking lower ground.

If option “B” takes shape, I wouldn’t be surprised to see another 10% chopped off the averages before all is said and done.

Stay tuned…

Regards,

Greg Guenthner
for The Daily Reckoning

P.S Keep an eye on those October ’14 lows. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, right here. Stop missing out. Click here now to sign up for FREE.