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What’s unnerving about the S&P 500′s pullback this year
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What’s unnerving about the S&P 500′s pullback this year

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What’s unnerving about the S&P 500′s pullback this year

The number of days that it took the S&P 500 SPX +0.10% to fall 5% this year is troubling, says Sam Stovall, chief equity strategist at S&P Capital IQ.

The benchmark index needed 23 calendar days to drop 5%, and that could mean a greater chance of a steeper decline, Stovall writes in a note out Monday.

A fast 5% decline — in nine days or less — ends up “being over quickly since investors acknowledge with a nervous chuckle that they overreacted,” he says. And a drawn-out pullback of 5% — one that takes 40 days or more — also doesn’t usually lead to a drop of 10% or more, the S&P strategist writes, because it “gives investors time to evaluate the concerns and thereby dissipate the overall impact.”

So here’s the problem with this year’s retreat, according to Stovall:

“What unnerves me about this decline … is that the number of days it took to fall the first 5% is right smack in the sweet spot of times that the S&P 500 has slipped into brand-new bear markets. Since 1946, there have been 20 times that the S&P 500 dropped below the 5% threshold in 20-29 days. Of these, half of them eventually declined by 10% or more, and 35% of the total didn’t stop falling until they became brand-new bear markets.”

A bear market refers to a drop of 20% or more.

But even if U.S. stocks end up in a bear market, Stovall argues that for long-term investors, it is usually better to be buying than bailing out. There have been 88 declines of 5% or more since World War II, and 57 of them were pullbacks of 5% to 10% that “took one month to materialize and a little less than two months to get back to breakeven,” he says. Stovall continues:

“…even when you include ‘Garden Variety’ bear markets, or declines of 20%-39.9%, it has taken the S&P 500 an average of only 14 months to get back to breakeven. So should an investor need his money in fewer than 25 months (11 months to decline, 14 to recover), then they probably shouldn’t be investing in stocks to begin with.”

Meanwhile, Jonathan Krinsky of MKM Partners is also sounding a cautionary note.

“As a result of the bounce late last week, we heard a lot of commentary along the lines of ‘is the correction over?’” writes Krinsky, MKM’s chief market technician, in a note out Monday. (Perhaps he noticed MarketWatch’s poll that asked that exact question. The most popular answer continues to be no, by the way.)

Krinsky says the time to ask that question was early last week, when the S&P 500 was “testing key support with extreme oversold readings.” He says: “We should now be asking the question, ‘is the oversold bounce over?’”

He adds that “any strength early this week above 1,800 is a selling opportunity. If this is 2013 all over again, then we will be proven wrong with a close above 1815 for the SPX.” Traders already had their short-term chance, he suggests.

“For now … we are under the impression that we had the ‘trade-able rally,’ and expect this bounce to stall as the SPX re-tests its 50 DMA,” Krinsky writes. That refers to the S&P 500′s 50-day moving average, which is curently at 1,809.

What's unnerving about the S&P 500's pullback this year - The Tell - MarketWatch

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