When is a sell-off just a sell-off? When is a sell-off a correction? When is a correction a downturn? And what defines a “bear market”? People offer various benchmarks, approaches and assessments. A decision-making framework that incorporates differentiated approaches and data sources is probably the best way to make one’s way.
The linkages between approaches and assessments available to the little people — typically via social media and financial news portals — are tenuous in most arguments. And even for those with access to real information (usually very expensive for us little people), there is some disagreement about which benchmarks to use.
It seems to me that context is what really matters. Call me Captain Obvious. When the context is understood and the facts are clear, the experts inevitably find the vernacular to cogently express the state of the markets. By the time this happens, it is usually too late for most of the little people like me to step out of the way…but I’m getting ahead of myself and probably not making much sense besides.
A myriad of technical and statistical benchmarks suggests that this sell-off is not yet a correction. A Twitter or StockTwits expert might say that “confirmation” is needed. And from a fundamental perspective, macroeconomic indicators in the US suggest we are quite safe from any near-term “downturn” — which in my mind puts brackets around any correction.
As a little guy, I try to keep things in perspective. Forgive me, but this is where I start to get a little pedantic. There is no doubt that the markets have sold off. And there is some evidence (by accepted measures) that the markets have entered a correction. A sell-off is merely a rapid and widespread decline in prices. The generally accepted definition of a “correction” is a 10% decline across major market indices (or even one). Confirmation can appear in any number of signs, most of them in the realm of technical wizardry but weakly supported by statistics. The simplest definition of a “downturn” is a decline across multiple indices of 20% or more, with a bear market usually defined as a downturn that lasts about a quarter or more.
So I’ve established (with myself) that I see a sell-off that also meets at least one criterion of a correction, but in a context of fairly sound fundamentals. While I don’t subscribe to any hard benchmarks in determining market stages, I appreciate them. Nothing I’ve seen gives me a clear path to agreeing with pundits, gurus and “fund managers” in the social media suggesting we are “poised” for a bear market. But real life rarely affords us the opportunity to clearly define anything.
As a correction is confirmed, common sense dictates the steps I should take to protect myself or to adjust my short term strategies. And this is where I need your help: Are strategies effective at protecting portfolios during a correction essentially different from those that are effective at protecting against a bear market? Is it just a matter of time, or is it a matter of scope as well?