Many investors and pundits have been almost begging for a market correction or any chance to get back in with two feet. They seem to be getting their wish courtesy of the earthquake, tsunami, and ongoing nuclear emergency in Japan. However, are they getting more than they bargained for?
What Is A Correction?
A correction is usually defined as a retracement or drop of 10% or so after a big run in stocks. The magnitude of the fall isn’t set in stone, but 10% is a standard level. Most market participants believe that these drops are pauses that refresh and renew bull runs and any sustainable bull market cannot exist without them, thus corrections are supposed to be healthy.
The problem I have with that definition is that it is too convenient for the real world. The market loves to make the majority look like fools, so too many people expecting a correction will not get one, and it surely will not seem routine when it happens. The current downdraft is a great example of how things never seem routine.
If everybody knew that it would be a temporary pause, nobody would sell. If anything they would be buying hand over fist the second stocks dropped. By definition, there has to be fear and pain in the air for stocks to drop meaningfully. It is easy to say looking back that a 10% drop was healthy and routine, but tell that to people right now who fear nuclear meltdowns in Japan.
The bottom line is that a correction is only “healthy†in hindsight or if it isn’t your brokerage account that is taking a hit. I don’t think there is any such thing as a healthy or routine correction while it is happening because it is that uncertainty that creates corrections. Remember that the next time some talking head claims it is healthy, and that they probably are playing with other people’s money or are not playing at all.
Is This The “Healthy†Correction? is an article from: 
