CNBC contributor Ron Insana urges investors to remain calm despite the return of volatility to the US stock market.
He explains that in a stock market “correction,” in which major market averages fall 10 percent to 20 percent from their most recent highs, “there is often a subsequent re-test of the lowest prices hit in the first leg down.”
Last Monday, the Dow fell 1,000 points in the first few minutes of the trading day, ultimately ending that day down nearly 600 points. Stocks fell again the next day and then seemed to bounce back.
“After a bounce, there is often re-test, where the averages touch, or even fall below, the prior move's lows. Usually it's just that — a test — and when the wash-out is done, assuming you see positive technical divergences and some fundamental developments that turn the market back around, the correction will be declared over,” he wrote on CNBC.com.
Stock markets plunged again Tuesday, continuing a rocky ride for Wall Street, after gloomy economic data out of China rekindled fears that the world's second-largest economy is slowing more than previously anticipated.
U.S. stocks are coming off their worst month in more than three years. The price of oil sank, giving up most of the gain it made from the day before.
Wall Street ended lower on Monday and wrapped up its worst month since 2012. In August, the S&P lost 6.3 percent, the Dow fell 6.6 percent and the Nasdaq declined 6.9 percent.
“Of course, if the market's internal strength deteriorates further on the second wave down, it could be indicative of something more serious. But right now, we haven't seen any sign of that, so panic would be premature,” he said.
“It has long been my view that U.S. stocks are in the midst of a secular, or long-term, bull market that is likely in its 5th or 6th inning,” he said.
“Prior to this correction, it had been 46 months since U.S. markets had suffered a pullback of more than 10 percent. Corrections occur, on average, every 18 months, so this was long overdue,” he said.
“Corrections, by their nature, are short, sharp and scary. Bear markets are long in the making and start with a whimper, not a bang,” he said.
“Ours is a correction — until proven otherwise.”
But other experts have a more dim view of the US market.
For example, Doug Ramsey, chief investment officer at Leuthold Group, fears that stocks can plunge even lower.
The problem is a shortage of cash that investors can use to buy equities after the Federal Reserve ended its quantitative easing program in late 2014, he told The Wall Street Journal.
The Fed was purchasing $85 billion of bonds a month.
In addition, Ramsey calculates the S&P 500's price-earnings ratio, using five years of earnings, at 20, up from a long-term median of 17.
The weakening of transportation, utility and industrial shares also has served as a warning sign for the market, Ramsey says. This looks like “a garden-variety, cyclical bear market,” meaning a decline of 20 to 25 percent, he said.
A 25 percent drop from the S&P 500's May 20 record high of 2,134.72 would put the index at 1,601.
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