Street Signs

How Long Until the Next Market Correction?

Investors have been enjoying a bull market from as far back as October 2002, says CNBC’s Erin Burnett today on “Street Signs.” So is a correction imminent? Mark Arbeter of Standard & Poor’s says yes – and it’s best we get it out of the way now. If the market doesn’t let off some steam, it could suffer a 1987-type crash.

Arbeter, the chief technical strategist at S&P, uses an indicator that tracks the trading volume of the Nasdaq and New York Stock Exchange to predict market corrections. Any time the Nasdaq volume is 40% higher than the NYSE over a three-week time period, there’s a dip in the numbers. According to Arbeter, it has happened once in 2004, 2005 and 2006, and the S&P 500 corrected about 7%-8% and the Nasdaq about 13%-17%.

Stock Correction Looming?

Paul Hickey says if you want to predict a market correction, flip a coin. You’re just as likely to guess when one will come by choosing heads or tails.

“A correction today is just as likely as a correction any other time – six months ago, eight months ago or nine months ago,” Hickey says.

Hickey, an analyst at Birinyi Associates, notes that this bull market may be a long one, but there hasn’t been much absolute price appreciation. Prices are climbing a meager eight basis points a day. Even after last week’s gains, prices only rose 2%.

Arbeter is bullish over the long term, but he thinks it wise to stay out of the market for now. Better to invest in March or April, he says. He is predicting a 1,600 S&P, but after eight straight months of increase, a correction must be coming. That feat has only happened four times before, and the market has paused each time after.

Wells Capital Management's Jim Paulsen has said that he’s expecting a crash on the scale seen in October 1987. Arbeter does see potential for that to happen, which is why he’s hoping the market corrects now rather than building the entire year and then making a major adjustment in the third or fourth quarters.

“I would be worried if we didn’t get the correction now, early in the year,” Arbeter says.

A previous version of this story incorrecty referenced U.S. Treasury Secretary Henry Paulson instead of Wells Capital Management's Jim Paulsen.