It sure seems that way. Many hedge fund managers have been awaiting the elusive traditional correction of 10 percent. It has been a record number of days since such an event has occurred, which has frustrated both market Bears, who want to profit from such a sell-off, and Bulls, who are awaiting a better entry point. There have been many un-traditional corrections, measuring 4 percent to 7 percent, which we have warned about over the past few years.
There are some advantages to movements, at least from a traders and managers standpoint. The most recent such correction, which occurred in January, resulted in a 6 percent drop for the S&P 500 Index and a 7.5 percent dip for the Dow Jones Industrial Average, when measured on a peak-to-trough basis. That correction took place over a month, and was relatively fast.
Our records indicate that the last traditional 10 percent correction occurred two years ago. In March 2012 DJIA peaked at 13,289 and SPX peaked at 1,422 in April. DJIA fell to a low of 12,035 and SPX dropped to 1267 during the month of June. Those were corrections of 9.4 percent (just missing the official designation) for DJIA and 10.9 percent for SPX.
The benefits of un-traditional corrections, as we have named them, are that they take place quicker, and provide opportunities that not only permit us to participate quicker, but reduce the frustration and waiting time that long-only managers incur with traditional corrections.
We believe that the dimension of time is important. It not only provides opportunity but also reduces the economic costs associated with such periods. After all, interest and overhead must still be paid, regardless if we are able to trade or not. From a technical analysts point of view, the shorter more volatile correction presents both challenges and opportunities since we see less in the line of basing patterns and more reaction to our oscillators. From an option traders standpoint, the quick and fast method raises premiums and volatility levels, creating new opportunities for writing and building spreads where a slow decline may do little toward pushing risk values higher. During the January non-traditional correction, the CBOE S&P 500 Implied Volatility Index (VIX) jumped from 13.57 to 21.48, which increased our ability to build new strategies.
Electronic trading and the quickness of the markets have contributed to the quicker time frame for corrections, at least in our view. Like other market dynamics, the changes in technology, liquidity, and additional trading products have hastened the time frames.
So, at least in our view, we prefer a quick 4 to 7 percent correction than a drawn out 10 percent plus dip.
Michael Levis is senior principal and chief investment officer at Olympian Group of Investment Management based in Ft Lauderdale with offices in New York. He offers research and alpha strategies at his newly launched Increasing Alpha.
The opinions expressed in this Commentary do not reflect the editors of Traders or its parent company Sourcemedia.
