The 16% drop in the CDNX over the past 14 trading sessions has not been pleasant and more downside action should be expected. But we caution investors not to panic and start throwing stocks overboard. This is not a repeat of 2008 and there’s a very strong chance, based on historical patterns and favorable long-term moving averages, that this market will be significantly higher in three months than it is now (maybe even significantly higher within a month).
The CDNX is now clearly in the midst of a major correction. We’ve seen this in previous bull markets so while this is certainly a little gut-wrenching, it’s nothing extraordinary and completely normal. And it also presents an incredible opportunity to make boatloads of money.
Let’s look at other major corrections the CDNX has experienced since 2004:
2004 – 19% drop over 31 trading sessions from early April to mid-May (1890 to 1530)
2005 – 21% drop over 50 trading sessions from March to May (2025 to 1590)
2006 – 29% drop over 22 trading sessions in May (3300 to 2350)
2007 – 29% drop over 17 trading sessions in August (3320 to 2350)
2008 – 18% drop over 12 trading sessions in January (2875 to 2350)
(Of course later in 2008 we witnessed the greatest crash of all – a 75% drop over almost 6 months from July into December).
If you were a buyer toward the end of the five major corrections cited above, you likely made a lot of money. The CDNX rebounded sharply after each of those corrections.
Excluding the extraordinary fall over the last half of 2008, the average percentage decline in the five major corrections between 2004 and early 2008 was 23% over an average duration of 26 trading sessions. So far this month the CDNX has plummeted 16% over 14 sessions. That implies the Index likely has further to go on the downside – a 23% drop would take it down to about 1300, just below its rising 300-day moving average.
While the CDNX’s 100-day moving average has now started to decline – suggesting some further weakness – the all-important 200 and 300-day moving averages are still rising with no danger of reversing. Our worst-case scenario is that the CDNX bottoms out at 1,200 (a 30% correction) where it has tremendous support. An average 23% correction takes the CDNX down to 1300. There is also strong support at 1400.
With 2008 fresh in everyone’s minds, there’s a lot of fear and panic in the markets right now. That’s actually a good sign that a bottom is probably near. The CBOE total put-call ratio right now is at an extraordinary extreme – by far its highest reading in over a year.
Those brave enough to buy into further declines in the CDNX are likely going to be handsomely rewarded by this summer. This is how fortunes are made – buying when everyone else is selling within an ongoing bull market.
