The third and final installment of the Cult of the Bear series is posted at TheStreet.com, titled Part III: Making the case for Dow 6,800.
Here’s an excerpt:
"One oddity of the move off of the prewar lows in 2003 is that the S&P 500 has yet to have a 10% correction. During the bull market period from 1996-2000, there were six corrections of 10% or more. Since the bottom on March 5, 2003, the S&P has sustained only three corrections of more than 6% and none greater than 9%.
Regular corrections serve a purpose for healthy markets: They cleanse the excesses that tend to develop, allowing further gains to proceed.
The lack of a 10% correction reveals high levels of complacency — something the CBOE Market Volatility Index (VIX) has been implying for quite some time. This creates "air pockets" — soft spots in the base of support that can potentially become more vulnerable to selling in the event of a test. As the 1966-1982 chart shows, broad trading ranges typically experience much greater than 10% corrections. Considering how regularly markets pull back and test support, the longer we go without that 10% correction, the greater the possibility of a steeper and deeper downturn.
The suggestion of a 30% fall in the S&P 500 has engendered widespread disbelief; investors broadly discount the mere possibility of such a correction. But as the nearby chart shows, there were five corrections that ranged in strength from 25% to 45% from 1966 to 1982. That averages out to one major correction every 38 months or so.
The S&P’s last major correction was a 33% drop from March to July 2002. That was 42 months ago — implying we are overdue for another steep decline."
Regular blog readers have recognize many of the arguments in the column.
Cult of the Bear III: Getting to Dow 6800
RealMoney.com, 1/18/2006 7:24 AM EST