Market Correction Seems Likely

“The market is long overdue for a correction in the 10%-plus range,” says one of our options analysts, Wayne Burritt. “Last week, it bit off about 5% of that. And that means we have another 5%-plus to go. Take a look for yourself in this daily chart of the S&P 500:


“As you can see, the market took it on the chin last week. From a high of 923 to a low of 879, U.S. stocks shed 4.8%. No matter how you slice it, last week’s action certainly falls into the pullback category.

“So where do we go from here? Notice the dotted red line on the chart. That’s near-term support in the 825 area. From last Friday’s close, that would represent a 6.6% haircut. Add that to the 4.8% we took off last week and, all told, we’re at an 11% pullback.

“Now, this kind of correction — at this magnitude — wouldn’t bother me one iota. Don’t forget, from a low of 667 on March 6 to a high of 930 on May 8, the market has soared a mind-blowing 39%. So a 10% correction or so is certainly nothing to cry about.

“The fact is any investor or trader worth his salt looks for and welcomes these kinds of relatively gentle corrections. Not only do they allow for profit taking, but they also discount share prices so more investors have the chance to get excited about the market. After all, new investors with new money need a way into a market, and pullbacks provide just that kind of opportunity.”

The Daily Reckoning