Dow Correction? We're Not Even Close Yet

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stock markets are finally reminding investors about the risk side of the risk-reward equation, with the Dow Jones Industrials (DJINDICES: ^DJI  ) responding to turbulent conditions among emerging-market economies by ignoring positive earnings news and plunging 186 points as of 12:30 p.m. EST. Predictably, a second straight day of triple-digit declines has some already trumpeting a "correction" in stocks. But before you declare the bull market over, it's important to realize that we haven't even come close to what most people used to consider a correction.


Source: Wikimedia Commons, Jean-Pierre Lavoie.

Even taking today's declines into account, the Dow is down just 3.4% from its record level set on New Year's Eve. The S&P 500 (SNPINDEX: ^GSPC  ) has had an even smaller fall, to a level just 2.4% below the record it set just nine days ago. Nearly three-quarters of the Dow's 30 components are within 10% of their yearly highs, and fully half a dozen stocks in the blue-chip index are within 5% of their record highs --  Boeing (NYSE: BA  ) , Visa (NYSE: V  ) , Disney, Home Depot , United Technologies, and Johnson & Johnson. Moreover, in the context of Boeing's 91% gain in the past year, a mere 5% drop is hardly worthy of notice.

The reason why so many investors are near panic is that they're not used to seeing any choppiness in the markets. In terms of market volatility, 2013 was extremely unusual, with rock-bottom levels in the S&P Volatility Index (VOLATILITYINDICES: ^VIX  ) lasting pretty much throughout the year. Even though the Dow has soared from below 7,000 less than five years ago to more than 16,000 today, investors still have the mindset that triple-digit daily moves are extraordinary. Last year, the Dow moved 1% or more in either direction just 23 times out of 250 sessions, and on only two occasions did 1% moves come back-to-back. Nor has this year been drastically different -- even if Dow drops more than 1% at the close today, it would still mark just the third 1% move for the average since Jan. 1 despite the perception of higher volatility in 2014.

As you assess your risk tolerance, it's important to stay aware of some simple facts:

  • Even for just a 5% correction -- something you'd expect to happen three times a year on average -- the Dow would still have to drop another 275 points from here.
  • A 10% correction -- which usually happens roughly annually -- would involve the Dow dropping 1,100 points from current levels.
  • If a true bear market hits -- usually defined as a 20% drop and occurring about once every three or four years -- then it would mean the Dow would have to fall about 2,750 points.

In short, if you think what we've seen so far in 2014 is a correction, then you don't remember what a real correction looks like. That doesn't mean you should panic, but it does mean you need to remind yourself of how markets typically behave before making decisions about how much risk you're willing to take on.

Don't panic
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Read/Post Comments (24) | Recommend This Article (35)

Comments from our Foolish Readers

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  • Report this Comment On January 24, 2014, at 12:44 PM, Gump1968 wrote:

    Well said

  • Report this Comment On January 24, 2014, at 1:20 PM, TENOFWANDS wrote:

    The bull market will last as long as the bull. We have not come close to making the fundamental structural changes necessary to avert the issues of 2008. That realization will require a far more severe event than that of 2008.

  • Report this Comment On January 24, 2014, at 3:04 PM, monywise wrote:

    S&P just broke resistance , at 1,800 Next support 1750

    Looks very like the beginning of a correction to me

  • Report this Comment On January 24, 2014, at 3:26 PM, ffbj wrote:

    In the midst of a correction that people have been calling for, for a long time. We will probably overshoot on the downside. Look for a bounce mid-week next week as bargain hunters come in.

  • Report this Comment On January 24, 2014, at 3:30 PM, Mathman6577 wrote:

    If you are in the long term ... a few weeks and a 5% or 10% drop mean nothing.

  • Report this Comment On January 24, 2014, at 5:21 PM, dackerman21 wrote:

    Here comes the panic selling. This is just what smart, patient long-term investors look for. Now is the time to start making a list of stocks to considering buying. Over the next few weeks and months, if the sell-off picks up some legs, then that is the best time to buy solid companies.

    We have seen this many times before. It feels like ground hog day.

    Over this weekend there will be a ton of articles calling this the beginning of the next crash, calling this the beginning of the move to DOW 3,000, etc. It will never end.

    If you remain vigilant, patient, and do some good thinking and research on which companies will be bigger, better, and stronger in 5 years from now, then this is exactly what you want to see.

    Don't look at your portfolios, don't read all the articles, don't get fooled into thinking that this is the beginning of the end of the world.

  • Report this Comment On January 24, 2014, at 8:32 PM, Mirror16 wrote:

    DON'T PANIC! DON'T PANIC!

  • Report this Comment On January 24, 2014, at 11:01 PM, luckyagain wrote:

    Monday will be the key. Another triple digit down day would set the stage for a down week. A 1% or 2% up or down is just noise unless followed by a few days in either up or down. I expect to see a lot of buying if a 5% drop happens. Whether that is enough to stop further declines is hard to say.

  • Report this Comment On January 24, 2014, at 11:55 PM, NOTvuffett wrote:

    Everyone already knows that there will be a correction,

  • Report this Comment On January 25, 2014, at 10:14 AM, soccball wrote:

    Stock market: Rich get richer;poor get poorer.

  • Report this Comment On January 25, 2014, at 12:18 PM, camarodan64 wrote:

    margin call sell off thats it, cash is buying now.

  • Report this Comment On January 25, 2014, at 1:00 PM, NOTvuffett wrote:

    "Even for just a 5% correction -- something you'd expect to happen three times a year on average -- the Dow would still have to drop another 275 points from here."

    your wish is granted.

  • Report this Comment On January 25, 2014, at 1:19 PM, vector242 wrote:

    Debt is secured by price.

    Price surges as long as real economy has time to make nominal payment on debt.

    A better place to look is in the US Treasury market and note Treasury yields over the years in various maturities. Note support and resistance levels.

    Real earnings do not support market price as much as tiime component does

    Time is money, money is time

    Could be running out of time...

  • Report this Comment On January 25, 2014, at 2:09 PM, Michaelnel4449 wrote:

    The wallstreet correction that I would love to see is much more regulation on these criminals and a truck load of indictments of the persons who caused millions of Americans to loose savings, retirement money and pensions....

  • Report this Comment On January 25, 2014, at 3:35 PM, drpearso wrote:

    Well at the close we only need another drop of 121 points now to reach a 5% drop in the Dow. And only 949 more points down to reach a 10% correction.

    Will see how Monday goes. Regards.

  • Report this Comment On January 25, 2014, at 3:52 PM, sciencedave wrote:

    Best advice? Sit on cash. Hold on stocks. Just as in the past.

  • Report this Comment On January 25, 2014, at 8:21 PM, jlclayton wrote:

    I agree, sciencedave. The advantage that a buy and hold investor has is that it doesn't make any difference if a market correction brings down the price of companies that they're holding. Good companies whose stock prices have fallen are buying opportunities that can set up great returns in the future. We are about 10 years from retirement, and a decent correction would give me the opportunity to add to several of our holdings at much more favorable prices.

  • Report this Comment On January 25, 2014, at 11:02 PM, ayap8888 wrote:

    This is the correction - don't think it will go down that much further. Money will be withdrawn from all Emerging Markets .. and where do you think Investors will put their money ???? Haven't you thought of that? Sure, the last 2 days, they put it in US treasuries - but not for long. They know the US companies have done well with the first few rounds of earning report. Global money will be flowing into US equities. Where else will you make decent returns for 2014 ? Not the emerging BRIC markets. It's in U.S.A !

  • Report this Comment On January 27, 2014, at 5:03 PM, The1MAGE wrote:

    First in response to soccball, who seems to have signed up just to post here, you said:

    "Stock market: Rich get richer;poor get poorer."

    This is an excuse. The rich loose money along with everyone else when the market goes down, and with a larger portion of their net worth generally tied to stocks, it actually hits them harder.

    But the smart will not overreact, or make stupid actions. Instead of selling, they will look for the opportunities in the market. They see sale in the market, not the loss of their portfolio.

    The more correct comment is:

    The smart get richer, the dumb get poorer.

  • Report this Comment On January 27, 2014, at 5:08 PM, MyCruiseWright2 wrote:

    The stock market is what it is, buy high, sell low, you lose. Buy low sell high you win, buy junk stocks and you will be highly likely to lose. Seems that the media and analyst promote hysteria which scares your average person out of the market. I look forward to getting good value stocks after each 10% or more market correction. If you don't panic and don't react the way the big players want you to, that is buy high sell low,you'll be fine. 95% of the time the reasons you hear the market went up or down is wrong because the people who get paid to talk about have to say something to get paid.

  • Report this Comment On January 27, 2014, at 5:17 PM, The1MAGE wrote:

    If a correction doesn't take more then a year for the market to recover, I don't think of it as significant. That has happened in 1987, 2000, and 2007. 3 times in over 30 years.

    I like to use Google finance, and look at the S&P chart with the Exponential Moving Average. (EMA) Though there isn't much difference between that and the Simple Moving Average. (SMA)

    You can see the EMA, tends to ride below the line when the market is climbing, and above the line when it is falling. It will go above and below temporarily, but you can see what is happening with the market at the time, at least over the long run.

    I set the chart for at least 5 years, and I can see that the EMA is still below the line, so I can't see any drop as significant yet.

  • Report this Comment On January 29, 2014, at 4:07 PM, SkepikI wrote:

    <In terms of market volatility, 2013 was extremely unusual, with rock-bottom levels in the S&P Volatility Index (VOLATILITYINDICES: ^VIX ) lasting pretty much throughout the year.>

    And that, Dan, makes the hair on the back of my neck stand up. Not the short down move after a year of rainbows and bunny rabbits. Or even a 10% correction with the systemic problems we still have about us.

  • Report this Comment On February 01, 2014, at 9:31 AM, regotoguy wrote:

    What concerns me the most is the record high margin outstanding. The high margin may accelerate a correction into a crash. I recently purchased TZA as an insurance policy.

  • Report this Comment On February 03, 2014, at 12:31 PM, NorthJoisey wrote:

    By my reckoning the Dow is down 6.7% since 12/31, as of this afternoon. Are we in correction territory yet?

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