S&P 500: 715 Days Since Last 10 Percent Correction

The S&P 500 SPM may bend but it rarely breaks — “breaks” meaning 10% declines or more. With the last 10% drop from May 1 to June 4, 2012, it dropped 10.4% in 25 trading days. Let’s face it, the Fed quantitative easing has supplied endless liquidity and is still doing so today. According to Goldman Sachs, 5% corrections “typically” happen a few times a year. Every 1-2 years a 10-15% correction will occur and 20% declines happen every 3-5 years, on average.

Runaway train

The popular idea is that when the markets sell off, investors jump on board. Well, for the last two years, there haven’t been any real selloffs. We could talk about the Ned Davis S&P 500 Price/Sales Ratio being higher than ever, but at the end of the day the markets have been overbought and going higher for the last two years.

In fact, many investors we talk to are not even interested in buying a 10% pullback. With the S&P up over 180% since making its March 2009 lows, investors continue to be scared of a larger pullback that never seems to happen.

When the markets were selling off during the credit crisis, most people were trying to protect what they had, not add more risk. It took many investors a few years just to figure out where they were, but by that time the markets were already exploding higher. After the beating most investors took, they were reluctant to chase stocks higher only to get burned again.

Waiting for the other shoe to drop

Waiting for a bear market to come along has cost the short sellers a lot of money over the last few years. All the downside “false starts” have done is get big-name market timers like Tom DeMark and Doug Kass to put out warnings and recommendations to sell. They have done it so many times it’s hard to believe that anyone would pay for their services. Sure, the bear market comparisons will continue, and so will the talk about an 1929- or 1987-style crash—but that’s not in the cards right now.

Conclusion: Big ugly corrections do happen after a big run-up such as the one we experienced in 1987. However, today is not at all like it was in the days leading up to the crash. In fact, nothing I see resembles what we saw in 1987. Our guess is that yet another relatively small pullback is coming and that by the end of 2014 the S&P is trading near 2000, not 1400.

Overnight, the Asian markets closed mostly lower, and in Europe 8 out of 12 markets are trading lower. Today’s economic calendar starts with Redbook and Philadelphia Fed President Charles Plosser speech on the economic outlook in Washington and earnings from Home Depot (NYSE: HD), Staples (NASDAQ: SPLS), Salesforce.com (NYSE: CRM), Medtronic (NYSE: MDT).

Turnaround Tuesdays: 16 up / 3 down of the last 19

Our View: Is the Friday Rip back? How about Mutual Fund Monday, up 6 in a row? Can’t you see how nothing stays the same? Patterns exist, then they don’t , then they reappear.

There are no economic reports and the the Q2 earnings season is coming to a close. Yesterday was a prime example of how Mondays start out the week: a low-volume grind. Our view is that today could end up like yesterday.

Turnaround Tuesday has been up 6 out of the last 7. Our view is that the S&P is going up, so buy the breaks. There area ton of buy stops above 1883 up to 1886 and again above 1889.70 to 1896.

As always, please keep an eye on the 10-handle rule and please use stops when trading futures and options.

• In Asia, 6 of 11 markets closed lower: Shanghai Comp. +0.15%, Hang Seng +0.57%, Nikkei +0.49%.
• In Europe, 7 of 12 markets are trading lower: DAX -0.19%, FTSE -0.48%
• Morning headline: “S&P seen lower ahead of U.S. retail sales ”
• Fair value: S&P -3.10 , Nasdaq -2.22 , Dow -72.75
• Total volume: 1ESM and 4.3k SPM traded
• Economic calendar: Redbook, Charles Plosser speaks. Earnings from Home Depot HD, Staples SPLS, Salesforce.com CRM, Medtronic MDT.