Key points:
- This week’s selloff sent major indices to more than 10% off highs, just a few trading days from all-time highs. In this report, we detail past 10% or greater corrections in both bull and bear market scenarios.
- In bull scenarios, the median depth is ~12% over 36 days. The next leg higher is typically a weaker-than-normal (11%), at up just 9%. This makes sense as the tendency after such a shock is to sell into strength.
- In bear scenarios, the median depth is also 12%, and the bounce is even weaker, at just 7%.
- We would not suggest buying the weakness and need to see several days with lows established at a minimum before becoming more constructive.
- With earnings season mostly complete, the good news is that Q4 earnings surprised to the upside, as is typical. The bad news is that 2020 estimates are still too high and continue to steadily decline.
