Top 10 Myths of Tuesday's Correction

3. Blame China's market crash.

On Tuesday, China's main indices were off 8.8%. However, it is doubtful this is what led to the cascading selloff in the US.

Why? Most local markets in Asia were off only modestly. The Hang Seng (-1.76%), the Kospi (-1.05%) and the Nikkei (0.52%) all had minor losses. (Note that some Asian markets close earlier than China's.)

Second, consider this fact: The combined value of China's Shanghai and Shenzhen stock markets -- the total market capitalization -- was $400 billion at the end of 2005. Over the next 14 months, it nearly tripled. Gains over the past six months were especially strong. After Tuesday's 8.8% plunge, the combined market cap was a mere $1.4 trillion, vs. $400 billion at the end of 2005.

To put that into some context, the NYSE's cap is $22.3 trillion, and the Nasdaq's cap is $4.2 trillion. Add in the Amex and other markets and the total US market cap is north of $27 trillion dollars.

By my back-of-the-envelope calculations, our 3.5% correction wiped out nearly a trillion dollars in US market capitalization, or more than two-thirds of the entire capitalization of both of China's exchanges combined.

I doubt Communist China's relatively small public markets alone are responsible for what happened here.

4. A Dow Jones Glitch caused the plunge

An absurdly false statement. By 2:55 p.m. EST, the Dow was off 295 points, the Nasdaq was down 95 and the S&P 500 was off over 3%. Indeed, trades in the Dow Diamonds and all 30 individual Dow Components were being reported correctly. Only the index (".INDU" on ILX or Bloomberg) was lagging.

Once the glitch kicked in around 3:00 p.m., most of the damage had already been done. Indeed, until that time, the glitch actually made trading look more orderly then it was. When Dow Jones switched to its back-up server, it rammed nearly an hour's worth of lagging reports through in just a few moments, moving the selloff from mild to wild in 60 seconds.

5. We got fluctuated!

On "Kudlow & Company" Tuesday evening, and then again in a Wall Street Journal editorial on Thursday, my pal Larry Kudlow went to the infamous J.P. Morgan quote, saying "Prices fluctuate."

Maybe, but prior to Tuesday, volatility had been nearly abolished and markets had only moved one direction -- higher. I mentioned this market was challenging J.P. Morgan's notions with its lack of volatility. When Kudlow corrected me -- "Morgan said Fluctuate, not Volatility" -- I replied "We got fluctuated pretty good on Tuesday."

And as I am writing this on Friday, we seem to be getting fluctuated pretty good again today.