Is the Stock Correction Over? Market May Seesaw for Months

The correction that investors thought had finally arrived is beginning to fade as the stock market settles into a pattern likely to continue for months.

For nearly a year now, investors have been waiting for a big earthquake of a correction, but so far have been hit by a series of tremors.

New York Stock Exchange
Photo: Oliver Quillia for

And that may well be the case for most of 2010 as the Federal Reserve seems intent on keeping interest rates near zero. That leaves investors with few other options but to wait for stock market dips to put their money to work.

A true correction—generally defined as a 10 percent stocks drop—remains elusive.

"What will trigger (a true correction) is interest rates increasing. As long as we get cheap money it will be very difficult to hammer this market down," says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn. "Unless something really blows up on us, it will be tough to have a meaningful correction."

The closest thing the market has seen to a correction since the rally off the March 2009 lows happened in a market fall from Jan. 20 to Feb. 8, the last time the Dow closed below 10,000. Stocks dropped about 8 percent in that time period but have since rebounded in a solid February rally.

The pattern has become familiar.

Some piece of news—doubts over Greece's credit spurred the most recent pullback—triggers selling, but other investors quickly step in and take advantage of bargains to propel the averages back up again.

It's as much a part of the "new normal" as is the extended slow growth forecast by bond giant Pimco and other analysts.

"When you look at stocks relative to other investments right now, there's just nothing out there that looks like it's attractive," says Tim Courtney, chief investment officer at Burns Advisory Group in Oklahoma City, Okla. "If you sell stocks you've got to park your money somewhere—cash is paying close to zero, bonds are sky-high in price, commodities like gold are sky-high in price. If you sell stocks at this point, where do you go?"

Courtney says most similar stock rallies are accompanied by 15 percent corrections but that could be difficult to achieve this time with so much money still out of the market as investors continue to look for entry points.

"It would take something like another threat to economic stability to cause maybe a 15 percent or bigger drop," Courtney says. "If you've got money in the sidelines now that you're looking to place as a long-term investment, I would be using those pullbacks as opportunities to get that money working."

Investors largely remain unconvinced either way.

The most recent survey from the American Association of Independent Investors shows "neutral" sentiment at a four-year high of 35.6 percent. Bulls are at 34.9 percent and bears are at 29.5 percent, about in line with the historical average.

The numbers reflect concern, but not panic, over an economy that continues to linger between recession and recovery. "Neutral" investors were last at this level when the market was midway between its 2003 bottom and 2007 peak.

"That does suggest that we've come a long way similar to the 2003 rally," says Richard Sparks, senior analyst at Schaeffer's Investment Research in Cincinnati. "The general consensus is things are OK but there's still enough apprehension out there to keep the market honest."

As such, the next correction is probably less likely to come from a technical level that the market can't eclipse than from some outside event.

"The overall macro fears seem to have abated somewhat with some resolution for Greece," says Justin Wiggs, vice president of trading at Stifel Nicolaus in Baltimore. "It's tough to get excited about a positive catalyst right now."

By the same token there hasn't been anything scary enough to send investors flocking to the exits.

The market weathered the Dubai World debt crisis in November, the Greece scare in January and a slew of economic reports along the way that show continued pressures in the job and housing markets and an economy growing largely because of cost cuts and inventory reductions.

There's even substantial sentiment that the markets will consider a Fed rate increase a positive because it will indicate growth.

But Tuttle sees the central bank's reversal as the only thing that will drive a real correction—which he thinks could hit 20 percent when the time comes.

"We certainly could if the Fed doesn't time everything perfectly," he says. "While past performance doesn't predict future results, their past performance with timing things does not impress me."