If This Correction Is Over, It Will Be Unique In Leaving Most Individual Stocks Unscathed

Authored by Bryce Coward via Knowledge Leaders Capital blog,

There are many different ways in which we can measure the severity of a market correction.

The absolute peak-to-trough decline is one way. Duration of the drawdown is another. But we can also measure corrections by taking note of the performance of individual stocks, in what is akin to looking under the hood. After most big equity market drawdowns (10% or more), what we typically find when we pop the hood is a shambles of beaten up individual stocks. It’s a symptom of investors selling their most vulnerable holdings when things get hairy, and it’s also a symptom of the type of selling exhaustion that causes markets to stop declining.

Luckily, we can measure the degree to which individual names have been beaten up by calculating things like the average stock’s decline from a recent high (chart 1), the percent of stocks making new lows in price (chart 2), the percent of stocks in a bear market (chart 3), and the percent of stocks with positive performance over a given look back period (chart 4).

What we find interesting about this market correction (so far) is the lack of individual names that have taken it on the chin. When examining the charts below it’s helpful to note all the previous  substantial market drawdowns in the S&P 500 since the late 1990s (excluding the bear markets): Summer 2007 (8%), Spring 2010 (16%), Fall 2011 (18%), Spring 2012 (9%), Fall 2015-Winter 2016 (12%). In each chart, the price of our United States Index is plotted on the right axis (red line) as the indicator is plotted on the left axis (blue line).

As we can see in chart 1, the average stock’s decline from its 65-day high was just 11% as of Friday the 9th. All previous significant market declines have been accompanied by this indicator pushing closer to the 15-20% level.

The percent of stocks making new 65-day lows stands at only 18%, a pedestrian number when looking back at market history. All the previous market declines mentioned saw this indicator breach 30%.

The percent of stocks in a bear market is also rather tame, at only 5%. Previous selloffs drew this indicator above 20% before they were over.

Finally, most stocks (54%) are still trading at a higher level that they were just 65 days ago. During past corrections, only 5-25% of stocks had posted 65-day price increases.

 

Comments

Endgame Napoleon Tue, 02/13/2018 - 08:28 Permalink

It is a snowflake stock crash with a helicopter parent. Too bad there is no helicopter for the bottom 80% of non-welfare-eligible citizens whose rent eats up more than half of their earned-only income except in the case of the citizens, legal and illegal immigrants who get their major household bills paid by governent for sex and reproduction, not to mention their up-to-and-recently-doubled child tax credit that maxed out at $6,444 before the tax-welfare reform. Helicopter government never rescued most in the bottom 80% from 40 years of stagnant / falling wages and skyrocketing rent.

juggalo1 Tue, 02/13/2018 - 08:47 Permalink

So far the "correction" has been much swifter but shallower than the runup.  Also if the market is becoming dominated by passive strategies, then the correction would be broader but shallower, with fewer individual names showing exceptional deep corrections.  Not surprising.  More about changed structure than the correction itself.

MrC Tue, 02/13/2018 - 09:45 Permalink

I don't know why the author uses a random 65-day high...and it is a random data point.

What we know from past studies is that at every major market high since 1900, by the time the major indices posted their final high, 20% or more of individual issues were off 20% or more from their 52-week (1-year) high. 

That is the data he should be looking at. Stock market tops are formed by the erosion of breadth. If that is not the case, it argues for a test of the highs later this year that will be accompanied by poor breadth.

TacticalTrading Tue, 02/13/2018 - 10:45 Permalink

Analysis is not relevant AT THIS TIME because the length of the correction in days (12 so far) is so short.

Assuming the correction lasts for a couple more weeks,
AND
these metrics stay the same, then we will have something remarkable

 

francis scott … Tue, 02/13/2018 - 14:48 Permalink

HOW IRONIC, MR COWARD.

At least for me it is.  For this correction, and its comparison to

"real" corrections in less manipulated markets, during much less

dangerous economies. 

 

You do realize that if the FED and WALL STREET hadn't manipulated

the Dow Stocks of the NYSE since the end of the 6 month recession of

December 2008 to June 2009, we'd all be living in a violent shit hole

that would make the ones in Africa look cozy.  

 

It's essential to remember that the 6 month recession, which ended

mid-2009, was  really an 18 month recession that began in December

2007, although we weren't told about it until days before Obama's election

in November 2008.

 

IF A RECESSION FALLS IN OUR ECONOMY AND THE NATIONAL

BUREAU OF ECONOMIC RESEARCH ONLY TELLS THE FED AND

THE FED DOESN'T TELL  THE AMERICAN VOTERS -- IN AN ELECTION

YEAR -- UNTIL A WEEK BEFORE ELECTION DAY,  DID ANYBODY

HEAR IT? 

 

 

That's not the irony about this 'correction' of yours I am talking about,

Mr Coward.  Mine is drawn from the film "The Caine Mutiny", based on a 

novel by Herman Wouk.  

 

One of the reasons the officers of the Caine want to remove Queeg as

Commander of the Caine is that he's paranoid and 'mentally disturbed'.

 

One of the episodes of this paranoia, Mr Coward, is the cowardice Queeg 

displays during the "Yellow Stain" incident.

 

Assigned to escort a group of landing craft during an invasion of a small Pacific island,

Queeg abandons his mission before he reaches the designated departure point, and

instead drops a yellow dye marker, leaving the landing craft to fend for themselves.

Queeg asks his officers for their support, but they remain silent and nickname him

"Old Yellowstain," implying cowardice.

 

If the correction, about which you've asked, is over, Coward, I can only reply

"did Captain Queeg complete his assignment of escorting a group of landing

craft during an invasion or did he speed up, come within 1000 of the beach,

drop the yellow dye (call a correction) to show how close he got and leave the

slower landing craft to fend for themselves?

 

 

Just because the media and knowledgable analysts are calling this a "correction" 

does it really mean that a technical correction has occurred, or is everyone involved

the market in the market running away from the action, back to the safety of being

between the devil and the deep, blue sea?

 

ARE YOU OLD ENOUGH, MR COWARD, TO REMEMBER BACK IN THE DAY, 

WHEN HOLLYWOOD MADE GREAT FILMS LIKE THE CAINE MUTINY?