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Street Debate: Does Last Week's 'Correction' Count?

There’s a debate raging among market strategists and technical analysts as to whether last week’s plunge was a long overdue, healthy correction or just a meaningless computer glitch.

Technically, the S&P 500 did fall greater than 10 percent from the intraday high for 2010 posted late April to the intraday low during last Thursday’s panic, meeting the technical requirement for a 'correction.' The drop to 1066 totaled almost 13 percent in fact.

“Sure the market was down all day, and a correction was overdue, but 650 points in less than 10 minutes?” wrote John Roque, managing director at WJB Capital Group. “That’s not a correction, that’s a joke.”

Roque continues to believe that investors should sell rallies as the corrective phase is not over. The technical strategist cites the collapsing number of new highs on the NYSE and the strong outperformance in gold and bonds as signs investors are still risk averse.

The S&P 500 is on track for its biggest jump in more than a year today for a very fundamental reason: the nearly $1 trillion bailout package approved by European Union leaders. It’s not rallying because the SEC has discovered what caused the sell-off last week. Four days later, we still do not know.

For his money, Carter Worth, chief market technician for Oppenheimer Asset Management, said last week’s correction counts. What matters is that “complacency and hubris have been expunged,” wrote Worth to clients. “Hundreds and hundreds of stocks are down to levels of support where rebound potential is high.” He recommends buying 3M , Cisco , and Ford , among many others.

The S&P 500’s 150-day moving average is still pointed upward, according Worth, citing a widely-followed trend indictor. “So long as the smoothing mechanism is rising, the stock, currency, commodity or index in question is bullish,” added the ‘Fast Money’ contributor. “By this time-tested definition, the U.S. equity market is still in a bull phase.”

Fundamental strategists seem to be just as torn. While the correction was lightening fast and possibly aided by some sort of computer trading failure, they are debating whether it washed out enough bullishness in enough stocks anyway to put the market back at a more fundamentally attractive level where buyers will come in.

“I advised investors to lift most of their downside hedges and volatility bets into last Thursday and Friday’s two-step believing Thursday’s low print of 1066 on the S&P 500 was likely the low-water mark for the correction,” wrote Jeffrey Saut, Raymond James’ head of investment strategy, in a note to clients today. “The equity markets remain in a bull phase” and the 13 percent drop using Thursday’s intraday low “is enough to satisfy me,” added Saut.

On Black Monday in October 1987, the Dow lost more than 20 percent in a single day, the largest one-day decline in stock market history. While valuation and other fundamental reasons were cited for the crash, program trading shared a big part of the blame as well. The market recovered sharply in the next week, but eventually stocks started falling again, bottoming ultimately in December of that year.

Karen Finerman is not so sure a similar pattern may play out here. “I don’t think there was enough volume printed at that intraday low on Thursday to legitimize it,” said the President of Metropolitan Capital Advisors. The hedge fund manager, whose time horizon is typically long term, sold some of her positions in stocks like Philip Morris that she scooped up during the panic last week.

For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC.

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