This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

The Correct View of Corrections: Opinion

NEW YORK (TheStreet) -- Relief rallies feel pretty good, don't they? That's what the past four trading sessions have been. We are still a couple of percentage points below the recent peak but it feels like investors are breathing a collective sigh of relief that last month's correction never technically became a correction.

You call that a correction?

Up to a 10% decline can be called something like a pullback or a dip, but not a correction. A correction occurs whenever the stock market drops by 10% or more. When we get to a 20% decline, peak to trough, we are now in a "bear market." Is this information helpful at all? The answer is, "Not really." 

Were we in a bull market at the end of 2008? Nope -- to invest at that point would have been no different than flushing your money down the toilet. You would have been investing during a bear market! Anybody who has passed the Series 7 knows that is a bad idea. Yet, in hindsight it would have been one of the smartest things you could have done.

So we want to buy low and sell high, but the media would have you believe that we rarely want to buy during a correction, and absolutely never buy during a bear market. Make sense? Why is it so easy to buy a shirt or a box of cereal when it's clearly marked "sale" but so difficult when it's the stock of a company you'd like to own?

In reality, the best times to buy are during bear markets and the best times to sell are during bull markets. Trouble is, you can look and feel quite foolish doing the right thing. Keep in mind that there will be an element of "wrong" in every single one of your investment decisions -- you will never buy at the absolute bottom and never sell at the absolute top. Come to terms with that, accept that this is not an exact science.

One definition of the word "correction" is "punishment intended to rehabilitate or improve." Of course, this is not the definition pertaining to a stock market correction, but I find the inclusion of the word "improve" interesting.

The efficient market hypothesis tells us that the market is perfectly efficient -- that every security is priced exactly as it should be priced, given all publicly available information at any given moment. The market does not anticipate, it reacts, and as a result prices move -- sometimes dramatically.

A correction can be viewed as the market being punished so it can improve. I think this concept applies to each of us investors as well.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $125.41 1.80%
FB $82.78 -0.62%
GOOG $551.24 0.53%
TSLA $189.89 2.60%
YHOO $44.86 -0.54%


DOW 17,992.96 +280.30 1.58%
S&P 500 2,084.49 +23.47 1.14%
NASDAQ 4,938.3950 +47.1760 0.96%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs