Market Correction
A market correction is a fall of 10% to 20% from a recent peak. How a stock market correction is measured, how often one happens, and an index example.
A market correction is a fall of 10% to 20% from a recent peak in a share, index or market.
Explained simply
Think of a long hill walk: a correction is the dip between two ridges, deep enough to notice, not deep enough to call the walk over. A walker standing at the bottom of the dip cannot yet tell whether the path climbs again or keeps going down.
Key takeaways
- The lines are conventions: 10% and 20% are not rules, but they are the standard labels. A fall of 20% or more is usually called a bear market.
- Measured from the closing high: the fall counts from the most recent closing high. Example (illustrative): an index that peaks at 8,000 is in correction territory at 7,200 and in bear-market territory at 6,400.
- How often: corrections happen regularly in long rises. Between May 1928 and October 2022, the S&P 500 fell 10% or more from a peak 55 times. Of those, 33 stopped short of 20% and 22 became bear markets. That is more than one 10% fall every two years, on average. The 33 corrections fell 13.9% on average and took a median of 87 calendar days, about three months, from peak to low.
- What can follow: a deep correction can end in capitulation, and rallies inside one can turn out to be a dead cat bounce. Neither is clear until afterwards.
Measuring a correction on an index
The levels below are illustrative. They follow one index down from a closing high of 8,000.
Close | Fall from 8,000 | Label |
|---|---|---|
8,000 | 0% | The most recent closing high |
7,600 | 5% | A dip, not yet a correction |
7,200 | 10% | Correction territory begins |
6,800 | 15% | Correction |
6,400 | 20% | Bear-market territory |
Three details change the reading. The peak is a closing high, so an intraday spike to 8,100 does not move the line. If the index rallies to 7,900 and then falls again, the fall is still measured from 8,000. And once the index closes above 8,000, the count starts again from the new high.
The same arithmetic sits behind the historical count above: each of those 55 falls was measured from a peak to the low that followed it. The labels describe a fall that has already happened. They say nothing about whether one is coming or how far it will go.
The lines apply to a single share, a commodity or a crypto asset as well as to an index. Assets that move more cross them more often, so a 10% fall in a volatile crypto asset is a routine event, while the same fall in a broad stock index is news.
On Ouinex
Corrections are usually measured on stock indices, which you can trade on Ouinex as CFDs, with zero commission on forex, stock indices and commodities, where you pay the spread: see what index CFDs cost on Ouinex.
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