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US stock market enters technical market correction

The S&P 500 enters a technical market correction as global stock markets plunge amid coronavirus fears.

S&P 500 Source: Bloomberg

The US stock market has entered into what’s considered a technical market correction. In response to the mounting risks to global economic growth and corporate earnings from the coronavirus outbreak, implied volatility has spiked in global financial markets. As a result, investors have dumped stocks in droves, and sought security in safe-haven assets. The sell-off is being dubbed the quickest market correction in history, and comes after the US stock market hit record-highs less than a fortnight ago.

What is a technical market correction?

The term 'market correction' originates from the discipline of technical analysis. It’s defined as a 10% fall from a recent high in the price of a physical or financial asset. Less a concrete concept, and more an abstract idea, the notion of a market correction denotes price action that represents a pullback in market prices from an overinflated level. A market correction by definition can not exceed 20%. Beyond that point, the sell-off is considered a technical bear market.

What does a technical correction mean for a market?

A market correction can simply mean that an assets price is pulling back from an overbought point. It does not necessarily imply the end of the trend. In fact, it’s more often considered a reversion to middle point of the prevailing trend. However, in some instances, a market correction can be the first step towards something more. When a correction begins to exceed 20%, and becomes a bear market, it represents a fundamental change in a short-, medium-, or long-term trend.

Everything you need to know about stock market corrections

What could this correction mean for the S&P 500?

The S&P 500 is certainly pulling back from overinflated levels. Following its record-breaking charge higher, US stocks had likely become overvalued, and was primed for a pullback towards longer-term averages, and closer to levels that represent 'fair-value'. However, there a signs that the S&P 500 could continue to plunge, as market participants price in a deterioration of fundamentals because of the coronavirus outbreak. The index has pierced its 200-day exponential moving average (EMA), representing a possible emergence of a new bearish, long-term trend for the market.

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