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Odds Favor Correction Over New Bear

Friday, 21 May 2010 | 12:23 PM ET

Based on 24 declines greater than 10 percent occurring during existing bull markets since 1962, the odds that this latest correction is actually the start of a new bear market are about 38 percent, according to Birinyi Associates. And if it is just a correction, then this is a great buying opportunity, history shows.

Nine of those times, the S&P 500 continued lower to form an official bear market, with declines of more than 20 percent. But the other 15 times the stock market rebounded sharply, gaining on average 5 percent, 17 percent and 21 percent in the one month, six month and 12 month periods following.

“The decline in risk assets has been, in our opinion, a bit overdone,” wrote Dan Greenhaus, chief economic strategist for Miller Tabak & Co., in a note that cited the historical rapid price appreciation that follows corrections as well. “With respect to US companies, we would simply note that a relatively small portion of S&P 500 earnings are generated from the euro zone.”

The S&P 500 bounced today, following a 12 percent drop from its 2010 closing high in late April. Investors stepped in following three straight days of declines after Germany’s parliament approved their end of the European bailout, strengthening the euro .

“The US decoupling from Europe is a myth,” said Brian Kelly, founder of Kanundrum Capital, who believes we are in for a new bear market. “We’re all globally linked. And China is slowing down too.”

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Past US corrections that ended shortly after a 10 percent decline have involved foreign forces, such as the Russian debt default of 1998 and the Asian currency crisis in 1997, according to Birinyi Associates. Whereas the last two full-blown bear markets here have involved US-centric forces, such as the housing collapse and the tech bubble.

For what it’s worth, the folks at Birniyi are bullish because of this historical data. “We remain bullish and target double-digit gains in the S&P 500 by year-end,” wrote Kevin Pleines, an analyst with the firm.

Regardless of how you feel, we should find out which way we’re headed in short order. The CBOE Options Volatility Index, a measure of fear in the marketplace, surged to 45 yesterday. The ratio, which measures the amount of bearish put activity vs. bullish call activity on the S&P 500 in the options pits, is at such an extreme that it is corresponding to future moves of almost 3 percent in the stock market every single day, according to calculations by MKM Partners.

So either this will be resolved very quickly or we are in for one crazy summer.

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

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Trader disclosure: On May 21, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova owns (PFE), (BMO), (SWN), (XCO), (EMC), (FTO), (YHOO), (AXP), (BBY), (TER), (STLD), (THC), (BTU), (AAPL), (DIS), (CVS), (IPSU); Terranova owns (GLD) JUN $115 Calls; Terranova Owns (GLD) June Calls; Terranova Owns (OIH) June Calls; Terranova Owns (PFE); Terranova Owns (RSX); Kinahan owns (C), (BAC), (AKS), (MSFT); Kinahan is short (SPY); Tomasulo owns (VXX); Tomasulo owns VIX calls; Tomasulo owns gold spot futures; Tomasulo owns (VZ); Tomasulo owns (PCLN); Tomasulo owns (V) calls; Grasso Owns (ABK), (BP), (BAC), (BGP), (C), (DYN), (JPM), (LPX), (NDAQ), (DCPA), (ASTM), (PRST); Kelly Owns (CAT) Puts; Kelly Owns (EMN) Puts; Kelly Owns (EXPE) Puts; Kelly Owns (WYNN) Puts; Jon Najarian Owns (BAC), (BAC) Preferred; Jon Najarian Owns (BP); Jon Najarian Owns (C); Jon Najarian Owns (JPM), (JPM) Puts; Cortes Owns (GS); Cortes Is Long Crude Oil; Cortes Is Short U.S. Treasuries

For Joe Terranova
Terranova Works For (VRTS)
Terranova Is Chief Market Strategist Of Virtus Investment Partners, Ltd.
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (DRYS)

For Steve Grasso
Stuart Frankel And Its Partners Own (AMR)
Stuart Frankel And Its Partners Own (BAX)
Stuart Frankel And Its Partners Own (CUBA)
Stuart Frankel And Its Partners Own (DHR)
Stuart Frankel And Its Partners Own (DYN)
Stuart Frankel And Its Partners Own (GERN)
Stuart Frankel And Its Partners Own (GS)
Stuart Frankel And Its Partners Own (HSPO)
Stuart Frankel And Its Partners Own (MERC)
Stuart Frankel And Its Partners Own (NWS.A)
Stuart Frankel And Its Partners Own (NYX)
Stuart Frankel And Its Partners Own (PDE)
Stuart Frankel And Its Partners Own (PFE)
Stuart Frankel And Its Partners Own (PRST)
Stuart Frankel And Its Partners Own (RDC)
Stuart Frankel And Its Partners Own (SYMC)
Stuart Frankel And Its Partners Own (TLM)
Stuart Frankel And Its Partners Own (TRV)
Stuart Frankel And Its Partners Own (XRX)
Stuart Frankel And Its Partners Own (SDS)
Stuart Frankel And Its Partners Own (TBT)
Stuart Frankel And Its Partners Are Short (QQQQ)

For Brian Kelly
Kanundrum Capital Is Short Euro
Kanundrum Capital Is Short Yen
Kanundrum Capital Is Short (USO)
Kanundrum Capital Is Short (XLB)
Kanundrum Capital Is Short (XLF)
Kanundrum Capital Is Short (EXPE)
Kanundrum Capital Is Short (WYNN)
Kanundrum Capital Is Short (IOC)
Kanundrum Capital Is Short (SU)
Kanundrum Capital Is Short (CME)
Kanundrum Capital Is Short (STT)
Kanundrum Capital Is Short (XLF)
Kanundrum Capital Is Short (CAT)
Kanundrum Capital Is Short (AA)
Kanundrum Capital Is Short (DOW)
Kanundrum Capital Is Short (XLK)
Kanundrum Capital Is Short (EMN)
Kanundrum Capital Owns (GLD)
Kanundrum Capital Owns (TLT)
Kanundrum Capital Is Short (DAI)

For Doug Kass
Seabreeze Partners Management Owns (ETFC)
Seabreeze Partners Management Owns (MTG)
Seabreeze Partners Management Owns (C)

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