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"Is It Time for a 'Normal' S&P Correction?"

By Helene Meisler
RealMoney.com Contributor
1/4/2010 7:02 AM EST

"Ever since the March 2009 low, the corrections in the S&P 500 have been marginal. We have had a handful of times when the correction got to 5% or 6%, but those times often occurred when we had a 2% or 3% whack in a matter of a day or two right at the end of the move. So in terms of time, the corrections were sharp and short.

However, if we look at the Russell 2000 we see two very distinct corrections -- both in double digits. From May to July, the Russell lost more than 10% in the course of two months. That is a normal and typical correction in my view as it took place over the course of time and reduced much of the excess.

In the fall, the Russell experienced a shallower correction, this time just around the 10% mark, but it too took place over the course of a few months. That is typical as well.

Nasdaq had two such corrections, only these were a bit shallower than the Russell in that they were both around 8%. But both took place over the course of time.

Can it be time for the S&P to have a normal correction?

When we look at some of the indicators I follow, we see that the 30-day moving average of the advance/decline line peaked in August and despite the recent rally and its strong breadth this momentum indicator hasn't come close to the previous peak. It has yet to surpass the October peak as well. It has a slight chance to do so this week, but the chances of surpassing that August peak are low; it is just about overbought.

The oscillator, which is a shorter-term momentum indicator, hasn't come close to its peak reading seen in September 2009. As a reminder, heading into the March low last year we saw a lessening of downside momentum -- the October low was extreme, the November low was less so and the March low even less than that; all were higher lows. In that case downside momentum waned as the market headed lower, eventually leading to a terrific rally. Now we have upside momentum waning as the market heads higher.


Another curious indicator is the McClellan Summation Index. As I've stated several times before, breadth has been terrific, fabulous and all other superlatives, yet this indicator based on breadth isn't even close to its high. What's more is breadth was positive for six days in a row heading into last week, and then it faltered (marginally) in the final two days of the year, and that was all it took to send this indicator back down.

Now an up day Monday can reverse that course and put this back on track toward the upside. But if I add up those six big breadth days I get 5,543; if I subtract those two marginal down days I get a decline of 1,269. So I am forced to wonder why after such a great run there is virtually no cushion to hold up this indicator. How solid was that advance?

We already know about sentiment, as I have reviewed that just prior to my vacation. It leans toward a decent amount of bullishness and complacency.

This is the first day of the first full week of the first month of the new year. I suppose that means there ought to be some "upside" seasonality involved, but it seems to me that with the turn of the calendar it might be time during January for the S&P to take its turn and have a real correction. "

(in www.realmoney.com)