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June 09, 2010

What is a market correction?

Recently there was a big drop in the stock market. Now there were many explanations given for the drop, but one I heard was that is was a typical market correction. Now what exactly is a market correction?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"That is sort of an insider's term -- insider meaning stock player term for when the market sort of pauses and it has been gaining for a while and gives back some of its gain -- sort of like it takes three steps forward, now it takes one step back.

"And it isn't necessarily the start of a down market like we saw in 2008. It's simply, well, what they say -- a correction. ... The market has perhaps grown too far, too fast. It needs to take a little breather.

"Typically -- typically, although there is no hard and fast rule on this -- a market correction is defined when the market goes down 10 to 15 percent. In the context of today's Dow Jones Industrial average, that would mean a loss of over 1,000 points.

"So I think the important thing for people to learn here is that typically we hear losses on the stock market measured in terms of points lost -- like 1,000d on the Dow. You shouldn't really get real upset about that. If again we're with a Dow over 10,000, you have a typical market correction, you are going to have a loss of 1,000 points. And again it doesn't necessarily mean that the market is going to go down for several, several months. It may simply be a pause before a new rise."

Posted by deeshore at June 9, 2010 09:18 AM