Bull Market corrections are common with an annual regularity but sifting through the data this morning we found a distinction between the -16% correction in 2010 and the -19.4% correction in in 2011. In both cases the “Superindex” created by Recessionalert.com had rolled over and assumed a negative slope.
In other words the average market correction since 2009 occurring without a negative slope by RA.com “Superindex” was a mild 6.77%. The two corrections that did occur with a negative slope had an average pullback of 17.7%.
The chart below is a graph representing RA.com’s 3 month probability of a recession along with trigger lines where recession is essentially assured. Notice at the 3 month probability line flirts with the trigger in both 2010 and 2011. Rising probability patterns must be respected by a reduction in risk assets such as stocks. Even though in both cases a recession did not materialize the impact on the stock markets was beyond a shallow pullback.
Not all market corrections are the same nor should they be treated as so. If we were to sustain market weakness in the near term it would likely be the shallow 6.77% variety since there is no uptick in recession odds at present.
