how a correction works
corrections are like that spider under your bed you know it s there lurking but don t know when it will make its next appearance while you might lose sleep over that spider you shouldn t lose sleep over the possibility of a correction according to a 2018 report from cnbc and goldman sachs the average correction for the s p 500 lasted only four months and values fell around 13 before recovering 3 however it is easy to see why an individual or novice investor may worry about a 10 or greater downward adjustment to the value of their portfolio assets during a correction many do not see it coming and don t know how long the correction will last for those who remain in the market for the long term however a correction is only a small pothole on the road to retirement savings 4 the market will eventually recover so they should not panic of course a dramatic correction that occurs in the course of one trading session can be disastrous for a short term or day trader and those traders who are extremely leveraged these traders could see significant losses during times of corrections no one can pinpoint when a correction will start end or tell how drastic of a drop prices will take until after it s over what analysts and investors can do is look at the data of past corrections and plan accordingly charting a correctioncorrections can sometimes be projected using market analysis and by comparing one market index to another using this method an analyst may discover that an underperforming index may be followed closely by a similar index that is also underperforming a steady trend of these similarities may be a sign that a market correction is imminent technical analysts review price support and resistance levels to help predict when a reversal or consolidation may turn into a correction technical corrections happen when an asset or the entire market gets overinflated analysts use charting to track the changes over time in an asset index or market some of the tools they use to determine where to expect price support and resistance levels include bollinger bands envelope channels and trendlines preparing investments for a correctionbefore a market correction individual stocks may be strong or even outperforming during a correction period individual assets frequently perform poorly due to adverse market conditions corrections can create an ideal time to buy high value assets at discounted prices however investors must still weigh the risks involved with purchases as they could well see a further decline as the correction continues protecting investments against corrections can be difficult but doable to deal with declining equity prices investors can set stop loss orders or stop limit orders the former is automatically triggered when a price hits a level pre set by the investor however the transaction may not get executed at that price level if prices are falling fast the second stop order sets both a specified target price and an outside limit price for the trade stop loss guarantees execution where stop limit guarantees price stop orders should be regularly monitored to ensure they reflect current market situations and true asset values also many brokers will allow stop orders to expire after a period investing during a correctionwhile a correction can affect all equities it often hits some equities harder than others small cap high growth stocks in volatile sectors like technology tend to react the strongest 5 other sectors are more buffered consumer staples stocks for example tend to be business cycle proof as they involve the production or retailing of necessities 6 so if a correction is caused by or deepens into an economic downturn these stocks still perform diversification also offers protection if it involves assets that perform in opposition to those being corrected or those that are influenced by different factors bonds and investment vehicles have traditionally been a counterweight to equities for example real or tangible assets like commodities or real estate are another option to financial assets like stocks although market corrections can be challenging and a 10 drop may significantly hurt many investment portfolios corrections are sometimes considered positive for both the market and for investors for the market corrections can help to readjust and recalibrate asset valuations that may have become unsustainably high for investors corrections can provide both the opportunity to take advantage of discounted asset prices as well as to learn valuable lessons on how rapidly market environments can change creates buying opportunities into high value stockscan be mitigated by stop loss limit orderscalms overinflated marketscan lead to panic oversellingharms short term investors leveraged traderscan turn into prolonged declinereal world examples of a correctionmarket corrections occur relatively often between 1980 and 2020 the s p 500 experienced 18 corrections 7 five of these corrections resulted in bear markets which are generally indicators of economic downturns 8 the others remained or transitioned back into bull markets which are usually indicators of economic growth and stability 9take 2018 for example in february 2018 two major indexes the dow jones industrial average djia and the s p 500 both experienced corrections dropping by more than 10 both the nasdaq and the s p 500 also experienced corrections in late october 2018 10each time the markets rebounded then another correction occurred dec 17 2018 and both the djia and the s p 500 dropped over 10 the s p 500 fell 15 from its all time high 11 declines continued into early january with predictions that the u s had finally ended a bear market abounding 12the markets began to rally erasing all the year s losses by the end of january and by april 2019 the s p 500 was up about 20 since the dark days of december 13