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Corrections vs. Bear Market

February 24, 2010 – 3:14 pm

It appears the current corrective phase of the stock market rally that began last March is easing. There have been only three corrections of any consequence in the last year: in June, November and now this one that started in January. The two corrections last year spanned four to six weeks falling 5% to 7%. The current correction is in its sixth week with about a 7.5% correction. Since the correction won’t be over until the prices of the indices recover or exceed their recent highs we can’t say it is over or that it is in fact a correction.

A normal correction is 10% but any fall of 5% or more can be called a correction and a return to a bear market usually means a 20% fall or more. Corrections are normal and during each one fear begins to mount as people speculate on the possibility of returning to the bear market lows of last year. It is normal for fear to grip investors and in fact it is healthy for stock markets when fear has that much power over investors.

It is in the lack of fear where stock markets become over valued. The last clear sign of that was in the dot.com bubble.

So as long as fear holds so many investors frozen on the sidelines and as long as they are making virtually no return in money market funds the stock market will likely only have corrections, not a return to the bear market.

Of course the underlying economy also plays a big roll in bear and bull markets but as we have said in previous commentaries we are in a recovery, slow though it may be.

Good Trading
Steve Peasley

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