Is Wall Street's biggest question: After a 7 percent drop from the highs, has the S&P 500 bottomed out? The answer may be impossible to know for sure, but historical analysis suggests that stocks may have a bit further to fall.
Carter Worth of Sterne Agee looked back on all the market's corrections of 5 percent or more going back to 1927, in order to get a sense of how long they tend to last, in terms of both time and magnitude. He learned that the average (mean) correction is 12.2 percent, and lasts for 41 sessions. The median correction, which is shallower because it is less affected by outliers, is 8.2 percentage points deep and lasts 22 sessions.
Given that the S&P closed Tuesday just over 7 percent off its highs, Worth takes this information as an indication that there will be more to this selloff.
"Were it to just be in line with the median, it means we have at least a percentage and a half to go. Were it to be in line with the mean or average decline, we're talking about another 4 or 5 percent to go. The principle being that this is unlikely to be at an end," Worth said Tuesday on "Futures Now."
Additionally, stocks were at all-time highs a mere 18 sessions ago, "so it's not even mature in terms of duration, not to mention magnitude," Worth added.
And while this may be dismissed as a quirk of statistics—after all, if one starts with all the time that stocks ever fell more than 5 percent, one is bound to find a bevy of times when it has fallen substantially—Worth says there are specific market dynamics that get triggered when stocks drop 5 percent or greater.
"The reason that that's an important number is that when a stock or an index or a currency goes down 2, 3 percent, nothing really happens, that's noise," Worth said. But starting at 5 percent, "stop losses start kicking in, or people start to de-risk, or margin calls [are triggered], or the spouse calls up and says, 'My gosh, we're losing money, do something.' The point is that once you're down 5 percent, you usually go down more."
It's certainly looking that way on Tuesday morning. S&P futures are down sharply in early trading, with the December S&P futures contract hitting the lowest level since April.