One of the most notable things about bull markets is how they continually surprise you to the upside. Quite often investors will tell themselves “the market is overbought and has to correct,” only to find that it either doesn’t correct nearly as much as they expect or doesn’t even correct at all.
As usual, expectations will often conflict with reality—or, at least, with history. In his recent interview with Financial Sense Newshour (click here for audio), Richard Dickson says that in a bull market, 10% corrections are actually quite rare:
“We’ve already had two corrections over 10% in this bull market—in 2011 and in 2012. And, historically, when you go back and look at all the bull markets that we’ve had since 1940…there has never been more than one 10% correction in any one bull market. Now this is based on the Dow—it is based on a closing price. There’s never been more than one 10% correction in a bull market since 1940 right up until 2009. Obviously we’ve had two this time.”
On a historical basis, this would imply that the market can keep going higher without seeing a significant correction—but certainly a pullback—assuming you believe the bull market will continue (Note: a “pullback” is usually defined as a 5% move over time from the highs, “correction” as a 10% move, and a “bear market” as 20% or more).
When asked whether he thought the bull market would continue, Dickson replied:
“Oh yeah—no question about it. We are not seeing any signs still of a major top. The July highs in the S&P, the New York Composite, obviously the July high in the Dow Jones, were all confirmed by the advance-decline lines as I pointed out before. You asked me about selling pressure—that really has not shown any kind of a dynamic increase. Historically, we have seen a significant increase in selling pressure at some point prior to the major market top. And there has been none.”
Given Dickson’s outlook for a continued bull market, one of the sectors he recommends to watch closely on a pullback is information technology, saying “that one is showing good relative strength, a good power rating, and a good short-term supply/demand matrix.”
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