The title of this commentary is Correction, and the reason I say that is because we have not had one in four and a half years.  I have been impatiently waiting for a 10% pullback in the market, and 10% is considered "a correction."  We are not there yet as the S&P 500 and the Nasdaq are both down 7.8% from their highs, and the Dow is down even less. 

That's right, 7.8% and all hell is breaking loose.  How soon we forget.  10%, 15% and even 20% corrections were no strangers to the market from 1996 through 2002.  Now panic is in the air and we haven't even hit 8% yet.  I'm almost rooting for another 2% drop just so we can get past it.

 

Let's look at the 1998 market as an example.  The S&P 500 fell 19% between July 17, 1998, and Aug. 31, 1998, as Russia devalued its currency and defaulted on its debt, and the hedge fund Long-Term Capital Management began to collapse.  Almost a similar situation today.  If we are going to see anything play out like 1998, we haven't even begun to drop.  And remember, 1998 was in the middle of one of the biggest bull markets ever.  Not that I believe we will drop 19%, but I wanted to show you what happens when the market drops precipitously. 

That initial 19% correction took just 6-weeks from top to bottom.  It was followed by a 4-week 14% rally.  Then a 2-week decline to a retest of the lows before the bull market resumed with a little help from the Fed after a surprise interest rate cut to try to save the day.  It seemed to have worked.

                                    Chart provided courtesy of www.decisionpoint.com

It would not be a surprise to see something like this play out this year.  It has been just over two 2-weeks since the Dow made a new high at 14121.  We have become somewhat spoiled to believe this 2-week decline is all we will get.  That said, we could see one of those relief rallies pretty soon here. 

If the Fed does decide to bail us out with a rate cut on Tuesday, how will market participants react?  Some believe it will bring on a rally, and others say it would prove how bad things really are and could spook investors. 

One thing for sure, if the Fed does cut rates look for the dollar to sink again.  That will benefit the I-fund.  That doesn't mean the I-fund will take off, but that the I-fund will be helped out by a falling dollar.

No buy signal yet from Trader Fred's TSP Trader System but the strength chart is showing signs of life.  See what Trader Fred has to say today, including his breakdown by fund on his system page.

The EbbChart System is on the sidelines today.  See where it goes next on the ebbchart system  page.

Divot has also updated his Market Brief commentary for Monday.

The Sentiment Survey System is on a buy signal for this week.

The gambler in me wants to take a shot at picking a short-term bottom, hoping today opens deep in the red followed by a snap back rally.  We do have the Fed on tap for tomorrow so that really would be gambling.  Anything can happen whether we get a rate cut or not.  If we hit that magic 10% level I may just step up.  By the way, most expect no rate change from the Fed but a change in the policy statement is likely. 

That's all for today.  I am currently 100% F fund in my account, but that could change any day.  See you tomorrow. 

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