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By Time Stocks Are in Correction It’ll Almost Be Over

Laszlo Birinyi
Laszlo Birinyi, president of Birinyi Associates, Inc. Photographer: Jin Lee/Bloomberg

One thing making people nervous about stocks these days is the fact the U.S. market has gone more than two years without a correction, or a 10 percent drop.

It just doesn’t feel right. Sort of like going two years without changing a car’s oil, or two days without brushing your teeth, or two paragraphs into a column without a good metaphor.

The last major dip for the Standard & Poor’s 500 Index was an 11 percent drop from its intraday high on April 2, 2012, through its low on June 4, 2012. This year, the closest it’s come was a 6.1 percent slide from the middle of January to early February and a 4.4 percent decline in April.

The suspense is building because of presumptions that corrections are inevitable, even healthy, parts of bull markets. Are they? Maybe. But good luck trying to predict them.

“Investors and analysts of all shades and sizes are obsessed with the idea of a correction,” Birinyi Associates Inc., a money management and research firm led by Laszlo Birinyi, wrote in a note to clients yesterday. “We have always held that these efforts to foretell a correction are in vain.”

Birinyi autopsied 14 bull-market corrections since 1982 to look at what they shared in common. There are a lot of useful points in this note to color your view of corrections and give you something to talk about at the beach or polo field or wherever this weekend.

Correction Count

First off, this bull market has already had more corrections than a rookie reporter. Besides the 2012 instance, there were two in 2011, a year full of sound and fury for stocks where the market ended up doing nothing, and one in 2010 around the peak of Greece’s debt crisis. That’s a total of four, the most of the six bull markets Birinyi analyzed.

There is usually one exceptionally bad day in the correction that accounts for about a quarter of the entire drop, Birinyi found, and it is more likely to occur toward the end of the correction. The “bad day” occurred in the final month of the retreat in half the instances studied.

There are remarkably few catalysts (six) that trigger corrections, according to Birinyi’s study, and none stem from traditional technical analysis. The most common reason cited is the U.S. economy, which was at least partially blamed for eight of the 14 corrections since 1982. Next was foreign economies, which were partially to blame for seven. U.S. politics were cited for four, while the Federal Reserve and interest rates for five.

Geopolitics and fundamentals, two potential catalysts regular invoked these days, only got partial blame for two and three corrections respectively, and neither has been a cause since 2002. As Birinyi echoed a point the firm first made seven years ago, “corrections are ‘event driven’ and are not organic.”

Here’s an event-driven prediction guaranteed to come true: Someone else will be calling for an impending correction sometime soon.

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