Summary: After gaining more than 7% by late January, US stocks have fallen into a 10% correction. It's the quickest decline of that magnitude from an all-time high in 90 years. While a fall in stocks was not a surprise, the speed and severity certainly were.

So what happens next? Prior falls like this have led to quick recoveries. That likelihood is further supported by a washout in breadth, volatility and several measures of sentiment. Moreover, the fundamental backdrop remains excellent. Risk/reward is heavily biased towards upside in the near term.

That said, strong down momentum normally reverberates into the weeks ahead. Equities sometimes "V bounce" but more often form a double bottom. A low retest in the not too distant future remains a greater than 50% probability. The longer term outlook for US equities is unchanged and favorable.


Two weeks ago, all of the US indices made new all time highs (ATHs). SPX and DJIA were up 7% and NDX was up 10% YTD. VXX, the ETF based on the VIX, was down for the year (the next two charts from Alphatrends). Enlarge any chart by clicking on it.


In hindsight, we now know that that was an interim top. Compare the chart above to the one below: most equity indices have lost 10% in two short weeks. Bonds have tumbled further. Volatility is 80% higher.



In the grand picture, a drop of 10% is not unusual, and so the last two weeks are not be a complete surprise. In a post on "What To Expect in 2018" (here), we showed that the median annual drawdown in the SPX has been 10%, and that even a 14% fall is within the normal range.