Dow Historical Corrections / VIX

from chartoftheday.com:

For some perspective on the current correction, today's chart illustrates all major stock market corrections (15% loss or greater) of the last 111 years. Each dot represents a major correction as measured by the Dow. For example, the bear market that began in 1973 lasted 481 trading days and ended after the Dow declined 45%. There are a few items of interest... Since 1900, the Dow has undergone a major correction 26 times or one major correction every 4.3 years. Second, most major corrections since 1900 (62%) have resulted in a drop of less than 40% while lasting less than 400 trading days. Since 1950, the percentage of major market corrections that were less than 40% and 400 trading days increased to 78%. As it stands right now, the current stock market correction (April 2011 peak to most recent low) would measure below average in both magnitude and duration.

VIX at highest since 2008:

French CDs, US market

French president Nicolas Sarkozy gave his finance and budget ministers a week to devise new measures to cut France’s budget deficit as shares in the country’s banks plummeted in the latest bout of financial markets turmoil http://ftalphaville.ft.com/thecut/2011/08/11/650251/focus-of-eurozone-crisis-turns-to-france/

Meanwhile, French CDs hit what Italy's were at in July:

Trading in equities and derivatives has hit record levels this week, the FT reports, as investors traded frantically in response to a tumult of factors such as the US Federal Reserve’s decision to stick with near-zero interest rates until 2013, http://ftalphaville.ft.com/thecut/2011/08/11/650191/trading-volumes-reach-record-levels/

Even after the recent plunge, stocks are still about 20% overvalued when measured on Professor Robert Shiller's "normalized" earnings--earnings adjusted to normalize profit margins--which is one of the only valuation measures that works.  Specifically, even after the crash, stocks are still trading at 19X cyclically adjusted earnings. As we can see in the following chart from Professor Shiller, over the past century, stocks have averaged about 16X those earnings. So we're still about 20% above "normal."  Importantly, though, 19X is a lot closer to normal than the ~24X recent peak. Stocks certainly aren't "cheap," but they're also not wildly overvalued anymore. (Source)


Bill Gross was right after all, though that hasn’t helped his investors this year. Former White House economic adviser Lawrence Summers and Christina Romer, the former chairman of the U.S. Council of Economic Advisers, were among critics who challenged a view promoted by Gross’s Pacific Investment Management Co. that the U.S. economy may be headed for a long period of below-average growth and high unemployment, a scenario known as “new normal.” Money manager Kenneth Fisher called the concept “idiotic.” http://www.bloomberg.com/news/2011-08-10/pimco-s-gross-proves-summers-wrong-as-selloff-shows-new-normal-is-real.html

sources -- zerohedge News you need to know (it's true) & moneygame chart of the day

Market and economic overview

From Zacks (Steve Reitmeister)

The tumbling of the market on Monday would have happened sooner or later given a deteriorating economic picture. So the S&P proclamation just sped up the process. But now we are at an interesting juncture. The major indices are all down around 16% from their peaks. That is a hefty discount when there is no proof yet of a recession and Corporate America just had a great earnings season. It could be said that risk and reward are now evenly matched and the next step for the market should be based upon the fundamental outlook. 
Meaning that if the economy is not headed into a recession, then stocks are a bargain and should head higher from here. Unfortunately the flip side is true as well. So if we do slip into a recession, then stocks will probably lose another 20-30% from these levels. Because of where we stand now, I am no longer so short the market. You could say that I have a created something akin to an options straddle with the use of leveraged ETFs. This will allow me to make money when the market decides to break out in one direction or the other. Until that happens I will be around breakeven for a while (I can think of worse outcomes ;-) 

A little bit longer one from David Rosenberg, Chief Economist & Strategist, Gluskin Sheff.  (I HIGHLY RECOMMEND READING THIS!) Courtesy of Mauldin's free email letter.  Instead of pullouts, I've bolded key points:  

As we had suggested in recent weeks, a U.S. downgrade was going to likely be more negative for the equity market than Treasuries, and that is exactly how the week is starting off. The reason is that history shows that downgrades light a fire under policymakers and the belt-tightening budget cuts ensue, taking a big chunk out of demand growth and hence profits. It is not just the United States — the problem of excessive debt is global, from China to Brazil to many parts of Europe. And let’s not forget the Canadian consumer.

John Mauldin / New Armstrong essay

http://www.johnmauldin.com/frontlinethoughts/the-case-for-going-global-is-stronger-than-ever/

I picked a nice time to take some time off!!! I'll have things to say as the week progresses, but Mauldin had a great guest post on Friday about emerging markets.  Good text & charts.  Worth a read.

Also, new-ish Armstrong essay (8/4/11).  3 pager def. worth a read