Pullback, Correction Or Bear Market?

We all know that stocks don’t go up every day. And that even during the healthiest bull markets there will be down days…weeks…and even months.  So, lets discuss the events of this past week so we can chart our course forward.

First, we need to define terms to appreciate what is happening now.

Bear Market: We all know this one. Decline of 20% or more from market highs. The last one was back in 2008-2009.

Correction: Market declines of 10-20%. Scary no doubt…but comes up just short of a bear market level.

Pullback: Reversal of trend back to a previous technical level…like a major moving average. Sometimes can also be a correction, but typically a smaller decline.

So which one is it…and what does that mean for the days ahead?  

Honestly, it is unknown until stocks start going back up on consistent basis. Pullback seems the best explanation, at this stage, as we are testing the 200 day moving average at 2765. Not surprisingly the bounce that occurred on Friday ended the session just above at 2767.  If it is only a pullback, then this 200 day level is quite likely to be tested again, and again before a lasting bounce unfolds.

However, I sense that this one could push into correction territory at 2647 or below. Why? Because the age of this bull run, and the rising rate environment, should lead to a deeper decline to shake off the complacency that has built up. That is especially true for the kinds of stocks that dominate the market cap weighted indices.

We spoke about this in last week’s commentary. Here is that key section again:

“However, because of this (rising rate) backdrop there are two groups of stocks that will likely underperform for a while.

  • Income Stocks: As rates go up, it makes the dividend yield by these companies less attractive. So prices often drop to find a better equilibrium.
  • Darling Growth Stocks: I am talking about FANG type stocks that have wildly outperformed leading to a premium valuation. They may see a little more right sizing in price as they did Thursday.
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Disclosure: Is PENN good enough to be one of the first 5 stocks added to the new Smart Investor portfolio? Unfortunately I can’t share that with you now. Final preparations are still being made ...

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