Market Corrections

Major corrections will always occur on Australian and other global markets. For a pointer on what to expect post a correction, it is valuable to re-examine five previous market corrections of the ASX/S&P200 (XJO) index from 2000 to late 2007. This is the index that covers the top 200 Australian shares. More specifically we will be looking at the falls of September 2001, early 2003, the two market falls in 2005, mid 2006 and the correction in February 2007. We will be looking at how much the market fell, how long it took to recover and any lessons that can be learnt, if any, from these market phases.

For an overview of Market Corrections compared to a Bear Market please click here.

Analysis

The tables below contain data on the previous corrections of the XJO since the year 2000. Table 1 indicates the dates of the highs and lows of the correction and their corresponding XJO value. Table 2 indicates the value of the drop in the XJO, the corresponding percentage figure and date that the previous highs before the correction were reached.

Table 1: XJO Corrections dates since 2000, Lows and Highs

Table 2: XJO falls, and date of recovering to previous highs.

The chart below is of the Aussie 200, XJO, since 2000 with the correction analysed above highlighted in yellow. While some analysts traditionally suggest a fall of over 10% is required before a sharemarket fall can be defined as a correction, for the purposes of this analysis a correction is defined as a sharp fall in a short period of time, generally over 5% and less than three months.

Observations

Notice in the chart above that correction 1 and 2 were over 10% and occurred during a time when the market was moving sideways. Correction 1 was more severe due to the terrorist attacks however, both were during a time of bearishness in the market. Correction 1 took the longest to reach the previous highs, around one and a half years, compared to around half a year for correction number 2.

Since the recovery in 2003, the share market has been in an obvious bull cycle. Each correction during this bull cycle has resulted in the market recovering fairly quickly. With correction 5 taking less than half a year to recover and correction 3 and 4 taking around 3 and one and a half months respectively. Admittedly correction 3 and 4 were less than 8% while correction 5 was nearly a 12% fall. If the bottom has been reached in this correction then it will be the lowest at 6.79%.

Conclusion

The evidence above basically shows that the market has a tendency to recover; however the time it takes to recover varies depending on market fundamentals. We are unable to ascertain whether or not the market has corrected it's whole amount or if there is more downside to come. But, what we can state is that if global fundamentals remain intact then the recovery will be relatively fast.