The Nasdaq is now officially in a dip, which I define as a drop of between 5 and 10 percent in price. Many large Nasdaq favorites are in defined downtrends (below major moving averages) and the weakness is starting to spread to the S&P names.
We’re not in a correction yet, which would be a drop of between 10 and 20 percent. We’re not even close for the broader averages. But because there’s been a huge emphasis on the top performers during the latter stages of the rally, momentum stocks tend to be overbought, over-loved and disproportionately commented upon.
For most people with normal portfolios, the recent spate of weakness feels more like a non-event. If you hadn’t been chasing the hot money trades this winter, you have no idea what people are carrying on about.
Should the S&P and Dow Jones follow the Nasdaq and Russell lower, I expect the commentary to grow even more cacophonous and panicked. The media has been starved of a scare for a long time now, they’re ready to seize to upon virtually anything to have an excuse to sound the alarm. Just witness the Flash Boys hysteria of last week for an example of this desperation.
I want to inject a bit of perspective here regarding the possibility of a correction. Bottom line, it’s not a big deal. If it happens, so be it. If it’s blamed on the Fed removing accommodation, that’s fine too.
Please keep in mind:
There’ve been 27 corrections of between 10 and 20 percent in the post-World War II period that did not become full-blown bear markets (of 20 percent or more). This averages out to one 10 percent-plus correction roughly every twenty months. The average one of these episodes results in a decline of 13.3 percent and plays itself out over about 71 days (just over two months). We’ve had three of these episodes since the market bottomed in March of 2009 – a 16% correction in 2010, a 20% correction in 2011, a 9.9% mini-correction in 2012 and nothing in 2013, not even a hint of volatility.
Perhaps last year’s absence of fear has engendered a trading populace unaccustomed to short-term declines. That’s a shame. History suggests we’d be better off getting used to them, they are a permanent feature of the investment game.