12.30.13: SP 500 Corrections off the March, 2009 market low

We’ll be out with our 2014 thoughts later this week, although we think 2014 could be another decent year for the SP 500: stronger economic growth, but a lower total return for the SP 500, which is hardly a stretch given this year’s +30% return.

What we worry about currently is the dearth of corrections we are seeing in the market, which we think would keep sentiment in check. The one very important factor to the stock market’s successful run since late 2011, is that anytime the SP 500 has corrected even briefly, sentiment on the part of retail investors has turned very negative, very quickly.

There are three main investor sentiment surveys that get media attention:

1.) The Investor’s Intelligence, which we hear about, but have never really followed. It’s current reading from what I’ve seen is too bullish, but again we don’t widely follow the release;

2.) The NAAIM (National Association of Active Investment Managers) which is currently at one of highest bullish readings in a very long time, which is understandable given the 30% return on the SP 500 in 2013;

3.) The AAII or American Association of Individual Investors, which is a nonprofit group that started in Chicago in the 1980’s. Per Bespoke, in this weekend’s newsletter, bullish sentiment in AAII’s weekly survey rose 7.6% to 55.06% this past week, the first time the survey rose above 50% since last January ’13.

The Street and the retail investor is getting too bullish, in my opinion, but if history holds true, all we need is a normal correction to correct some of the bullishness and growing optimism.

Here is a history of the SP 500 corrections off the March, 2009 low: SP500corrections. (I probably should have charted the VIX action alongside the correction, but we’re almost done with the piece now. We’ll add for next time).

The “average” correction off the March ’09 low have been 12.55% and have lasted 8 – 9 weeks. The two “Euro debt Crisis” distortions in 2010 and 2011 have been harsher than recent pullbacks in the index.

If history holds, I think we should start to see a decent pullback both in late January, February in ’14 and then a bigger correction in the Spring ’14.

The rally off the 2010 trough lasted almost 10 months: that has been the longest upside run of the rallies tracked. Most rallies have lasted 6 – 7 months which is the age of this current rally.

We’re navel gazing, but I wanted something to show to clients to start the new year.

Thanks for reading. More to come all week – have the blogging fever.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




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