Beginning in late 2012, as the Federal Reserve announced their latest innovation of“quantitative easing,” the markets launched into an uninterrupted advance that lulled investors into a complacent slumber. Well, that is until a couple of weeks ago when volatility returned with a vengeance and reminded investors that markets can indeed go down.
The markets were, after a near 8% fall, able to garner a bit of a rally from the intraday lows of last week that now has everyone asking whether the current correction is over. For example, Brett Arends recently asked that exact question:
“So how much further might the market fall?
If this is merely a regular correction in the course of a regular economic expansion, the answer may be: Not much further.
Corrections of 5% to 20% are a normal part of the stock market. Legendary Wall Street mogul J.P. Morgan, JPM +0.77% once asked for a stock-market forecast, confidently predicted that share prices would fluctuate. And he’s been right ever since.”
However, could the current correction be the start of something bigger?
First, let’s put the current “massive market correction” into perspective. The chart below shows the S&P 500 overlaid against the Volatility Index (VIX). While volatility did spike higher over the last couple of weeks, it is well within the bounds of the excessive complacency that has been the hallmark of the recent bull market surge.
In last week’s newsletter (click here for free weekly e-delivery) I stated:
“The markets did rally to initial resistance but failed to climb above it at this point. However, the markets are oversold enough on a short-term basis that we may see further rally attempts next week particularly if the Federal Reserve holds the line on their current ‘tapering’ process.”
That rally has indeed occurred as expected as “dove-ish” talk from the Federal Reserve, along with an impotent ECB, continues to make “hope” spring eternal for market bulls. Here is the problem. The Federal Reserve will end its current liquidity program next week and the ECB will likely be unable to expend enough “firepower” to pull the Eurozone out of its deflationary spiral.Â
