Would Someone Pull the Trigger On This Correction?

There's been a fair bit of blood running on Wall Street recently, culminating in yesterday's session which dragged the Dow Industrials below 13,000 for the first time since August.  Just a month ago, the index was celebrating a new all-time closing high of 14,164.  But despite the market turmoil that swelling oil prices and gloomy financial sector write-downs have conspired to stir up, it's worth noting that we still have yet to notch up a market "correction" in the technical "10% downside move" sense, gauging by any of the three major equity indices.

The Nasdaq Composite came closest yesterday, tumbling to 2,584, 9.7% below its multi-year intraday high of 2,861 on Halloween.

While I think equity markets broadly speaking are attractively valued at current levels, at this point I'd be delighted to see us finally cross the -10% transom.  We've been in a notably resilient bull market for almost five years and it's just been too long since we felt the purifying purge of a mild correction.  In short, if we would just throw up, we'd feel a whole lot better.

With economic fundamentals remaining strong, productivity soaring, the consumer hanging tough despite high oil and housing fallout, and the Fed looking increasingly likely to pull off the feat of guiding us through the growth deceleration period without slipping into recession, it's not terribly surprising that the markets are maintaining a generally buoyant keel.  But yesterday wasn't the first time investor behavior betrayed a bit of seasickness bubbling up.

The phenomenon we saw culminate yesterday played out in similar fashion three months ago.  After the Dow notched a very high profile all-time high on July 19th (hitting 14,000 for the first time and closing just a fraction above the psychologically significant level), the markets began a 4-week pull-back that saw the three major indices shed between 8% and 10%.  Hitting bottom on August 16th, the Nasdaq again came closest to tripping an official "correction", with a cumulative 9.9% decline.

Investors got over that bout of nausea and soon sent stocks to even higher highs.  But before long, those unpredictable economic crosswinds kicked up and the market doubled over again.  After yesterday's sell-off, it looked like we were finally going to hurl ourselves over the "correction" threshold.  But Wal-Mart and Goldman Sachs went and released a double dose of good news today, quickly restoring investors' constitutions.

I'm not one to pooh-pooh the good news, but the timing seems lousy.  One more session and we might've at least tagged the correction mark before rebounding.  There's nothing magical about the somewhat arbitrary 10% criterion of course, but as an established focal point, it's bound to serve as a reminder the next time stocks find themselves trading at fresh all-time highs and some shaky news pops up.  Investors will remember that this bull run has gone on uninterrupted a lot longer than typical market cycles would allow, and suddenly that old familiar squeamishness will begin to bubble up again.

We're eventually going to undergo that 10% retch, and the longer we put it off, the more of these 8% and 9% anticipatory heaves we're going to have to endure.

Previously:  Dow Back In Record Territory