Bending the Third Rail
Because We Should, We Can, We Do
Tuesday, January 30, 2007
To The Moon Alice!
Barry has a great post and chart up for today (click to enlarge):

What this chart is showing the number of consecutive days (left axis) since the stock market (S & P 500) has had a 2% correction, over a period going back to 1928. A correction is a period of time where the market declines and "consolidates" it's gains in preparation for a further move up (or down). This phenomena occurs because markets do not go straight up or straight down ...... normally that is. Markets are predicated on the value of what they buy/sell, in this case stocks in companies. Companies develop/lose value over time as economies expand/contract. It's a quite natural process in a healthy economy and can be relatively steady. But not this steady.

We've now had nearly four years since the last correction. Despite the fact that a market going up for four years sounds like a good thing, it is actually a sign of weakness. Think of it this way. If you stand with both legs under you, you remain stable. But as you begin to move one leg further and further stretched out, you get less stable until you fall over. That's what happens with markets that don't take breathers and consolidate.

Many folks have a name for this type of phenomena. It's called a bubble.