Financial Comment - Is a stock market correction coming?

Is a stock market correction coming?
We wrote some time ago about possible signs of a coming stock market correction and noted that, historically, the first group of stocks to start correcting has been the small caps. Some analysts believe that the usual time period is eight months for the smaller cap shares to decline prior to a general market top. Has the time arrived for the small stocks to decline? It may seem so as the Russell 2000 Index, which represents the small-cap segment of the U.S. equity universe, has now dropped by more than 9% since early March. Another indicator of the stock market strength, the tech-heavy NASDAQ Composite index, has dropped by almost 7% over the same period.

While the NASDAQ index has been moving sideways over the past month, Russell 2000 is continuing to decline. The index would enter correction territory if it dropped more than 10% off the peak. The broad market is still doing well with the S&P 500 index hitting an all-time high reading this past Tuesday, which was almost 9% up from the low posted in early February. The stock market participants are watching the stock indices closely as the broad U.S. market has not had a more than 10% pullback since the summer of 2011 and many believe that such a correction is long overdue.

The Canadian stock market seems to have decoupled from the American one. In 2013, all U.S. indices had a very good year, unlike Canadian indices. This year to date, S&P 500 is up by about 1% and Russell 2000 is down more than 6%, while the broad Canadian S&P/TSX Composite Index has grown by almost 7% and the small-cap index S&P/TSX Venture Composite is also up, by almost 5%. The Canadian indices are doing better as they are recovering from a long period of underperformance and also on the background of higher prices for some commodities. It remains to be seen whether a potential correction of the U.S. market will affect Canadian stocks.

By: Ukrainian Credit Union Limited