WHAT'S THE DIFFERENCE BETWEEN A CORRECTION AND A BEAR MARKET? -- LONG-TERM SUPPORT LEVELS FOR S&P 500 -- STOCKS REMAIN IN TRADING RANGE WHICH IS LIKELY TO CONTINUE -- VIX RETREATS
WHAT'S THE DIFFERENCE? ... There's a debate in professional circles as to whether the stock market is in a correction or a bear market. It makes a difference. Let's define what they are. A stock market "correction" is a drop of more than 10%. Most corrections average about -15%. A bear market is a drop of 20% or more. Bear market losses have averaged -33%, and last longer than corrections. The last two bear markets between 2000 and 2002 and 2007 to 2009 lost -50%. Those losses were much bigger than most bear markets. Those precise definitions can lead to problems however. The price bars in Chart 1 show the S&P 500 losing -21% during 2011 from May to the start of October. That qualified as a bear market. Closing prices, however, lost -19% which signaled a correction. I recall a debate at the time as to whether or not that qualified as a bear market. As it turned out, 2011 was only a correction. Moving averages "death crosses" often signal a bear market, but not always. Chart 2 shows the (blue) 50-day average falling below the red 200-day average during 2010 and 2011 for the SPX. [50 and 200-day EMAs also turned negative both years]. The SPX lost -17% in 2010 before turning back up. That was also a correction. Bear markets don't always last a long time either. Bear markets in 1987, 1990, and 1998 lasted only three months, and bottomed during October. The year 1994 has been described as a "stealth" bear market because bear market losses in the transports (-28%) and utilities (-25%) were masked by smaller losses in large cap indexes. The S&P 500 traded sideways all year but lost only -9.9% before resuming its uptrend the following year. That didn't even qualify as a correction. So let's not get too carried away with precise definitions.
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Chart 1
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Chart 2
A LONGER-RANGE LOOK AT THE S&P 500... The monthly bars in Chart 3 show the last two bear markets in the S&P 500 starting in 2000 and 2007 which lost -50% and -57% respectively; and the SPX reaching a new record in spring 2013 which ended the "lost decade" of stocks that started in 2000. The horizontal line drawn over the 2000/2007 peaks should act a solid floor beneath the price bars. A drop to that flat line would represent a drop of 26% which would qualify as a bear market. But that would still leave the SPX in a secular uptrend. The rising trendline drawn under the 2009/2011 lows shows potential support near 1700. A retest of that support line would be an SPX loss of 20% which just qualifies as a bear market. Chartwise, however, an SPX drop into bear market territory (-20% to 26%) would still be within its long-term uptrend. So it might not matter that much after all whether we're in a "correction" or "bear market" as long as the secular uptrend remains intact.
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Chart 3
S&P 500 IN TRADING RANGE ... Last week, I used Fibonacci retracement lines over the Dow Industrials to identify levels where more selling was likely. Chart 4 applies those (red) lines to the S&P 500 measured from its July high to its August low. The SPX has already run into selling near 2000 which was nearly a 50% bounce. It has lost ground since then, but remains above last week's climactic low. The SPX will probably "back and fill" for a month or two in an attempt to repair recent technical damage. That would take us into October which has marked the bottom of most previous corrections. A retest of the August low between now and then wouldn't be surprising. That would be an important test. As long as last October's low remains intact, I will continue to lead toward the "correction" camp. But there are enough negative warnings to justify a very cautious stance.
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Chart 4
VIX CONTINUES TO RETREAT... After spiking to a six-year high last week, the CBOE Volatility (VIX) Index has settled back below last October's high at 31. The VIX is called the "fear gauge" because it measures the level of concern among options trading. A rising VIX is considered bad for the market, while a retreating VIX is supportive to stocks. Readings above 20 are consistent with a stock market in a downside correction. The drop below 30, however, suggests that traders are less fearful than they were last week, which may be a sign that the stock market is in a healing process.
