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New Column: CULT OF THE BEAR, part III

Posted By Barry Ritholtz On January 18, 2006 @ 10:30 am In Investing,Markets | Comments Disabled

RealMoneyThe third and final installment of the Cult of the Bear series is posted at TheStreet.com, titled  Part III: Making the case for Dow 6,800 [1].

It ties together the top down, macoeconomics discussion (from Part I) [2] and the cyclical/technical analysis (from part II [3]), and makes the case that we are overdue for a 30% correction.

Here’s an excerpt: 

"One oddity of the move off of the prewar lows in 2003 is that the S&P 500 has yet to have a 10% correction. During the bull market period from 1996-2000, there were six corrections of 10% or more. Since the bottom on March 5, 2003, the S&P has sustained only three corrections of more than 6% and none greater than 9%.

Regular corrections serve a purpose for healthy markets: They cleanse the excesses that tend to develop, allowing further gains to proceed.

The lack of a 10% correction reveals high levels of complacency — something the CBOE Market Volatility Index (VIX) has been implying for quite some time. This creates "air pockets" — soft spots in the base of support that can potentially become more vulnerable to selling in the event of a test. As the 1966-1982 chart shows, broad trading ranges typically experience much greater than 10% corrections. Considering how regularly markets pull back and test support, the longer we go without that 10% correction, the greater the possibility of a steeper and deeper downturn.

The suggestion of a 30% fall in the S&P 500 has engendered widespread disbelief; investors broadly discount the mere possibility of such a correction. But as the nearby chart shows, there were five corrections that ranged in strength from 25% to 45% from 1966 to 1982. That averages out to one major correction every 38 months or so.

The S&P’s last major correction was a 33% drop from March to July 2002. That was 42 months ago — implying we are overdue for another steep decline."

Regular blog readers have recognize many of the arguments in the column.


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Source:
Cult of the Bear III: Getting to Dow 6800 [1]
RealMoney.com,  1/18/2006 7:24 AM EST
http://www.thestreet.com/markets/marketfeatures/10262175.html


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Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/01/new-column-cult-of-the-bear-part-iii/

URLs in this post:

[1] Part III: Making the case for Dow 6,800: http://www.thestreet.com/markets/marketfeatures/10262175.html

[2] Part I): http://www.thestreet.com/markets/marketfeatures/10260096.html

[3] part II: http://www.thestreet.com/_rms/comment/investing/10260656.html

[4]
: http://www.thestreet.com/comment/investing/10260656.html

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