Is the Stock Market Correction Taking Hold -- or Just an Oversold Bargain Again?

The old saying for investors each year is “as goes January, so goes the year.” We will leave the almanac figure analysis up to others, but investors are starting to wonder yet again if a full market correction is beginning to take hold.

24/7 Wall St. was looking at post-economic and post-earnings trading numbers, and it turns out that the Dow Jones Industrial Average (DJIA) now seems to be nearing a 1,000 point pullback from its high. Also, the S&P 500 Index is nearing a 100-point pullback from its high. We would remind readers that these are still very far short of anywhere close to that fabled 10% stock market correction that so many investors have warned about (or hoped for) for about two years now.

So, what are the real numbers telling us?

While DJIA hit an all-time high of 18,103 on December 26, 2014, the new level of 17,185 represents a 918-point correction. That is only a 5% drop. The S&P 500 hit an all-time high of 2,093.55 on December 29, 2014, and the new level of 1,994.35 represents a 99-point correction. This is not quite a 5% pullback.

Investors need to be aware that for technicians a true market correction is a 10% pullback from the peak. Nonetheless, some investors are beginning to wonder if stocks are oversold. Even if Bill Gross has said that the best days of equities have been seen.

ALSO READ: Credit Suisse’s Incredible List of Potential Surprises for 2015

The Volatility Index (VIX) is sometimes referred to as the “Fear Index.” As the number rises, it generally implies that stocks are selling off. When it reaches too high, it means most investors are panicked — and technicians often look for buying opportunities in an oversold market. Now the VIX is above 20.0, in a 52-week range of 10.28 to 31.06. The reality is that the VIX only rose above 25 by more than a few ticks on just two days in 2014 — and those days were the selling climax days of October.

Going back two years, the VIX never even came close to the panic oversold readings of last October. During 2013, there were only two selling waves in the stock market when the VIX ticked marginally above 20. The VIX was above 20 more than that in 2012, and of course it hit much higher levels in 2010 and 2011.

A 5% correction needs to be put in the context that the selling climax last October was the closest thing to a full 10% correction we have seen in two years. History dictates that this cannot go on forever, but go start polling investors whether they want to do panic selling or buying on dips right now.

The reality is that investors have used dips to buy their favorite stocks for well over two years now. In fact, the bull market will be six years old in just five weeks. The S&P 500 has rallied 214% and the DJIA has rallied 179% from trough to peak in this bull market.

At the start of the 2015, 24/7 Wall St. used it annual analysis to make a projection that the DJIA likely will hit 19,142 this year, and that would be an implied gain of over 11% from the new lower levels.

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