Correction

A Correction is a temporary decline of 10-20% in stock market indices or individual stocks from their recent highs. It's less severe than a bear market (which is 20%+) but more significant than normal daily volatility.

Formula

Correction Severity:

• 5-10% decline: Pullback (mild correction)
• 10-20% decline: Correction
• 20%+ decline: Bear market

Example

The S&P 500 rallies from 4,000 to 4,500 (+12.5%). A correction brings it down to 3,850 (-15% from peak, -14% from the high). Tesla (TSLA might rally from $200 to $280, then correct to $235 (-16% from peak). These are normal within bull markets.

How to Interpret It

• Normal part of bull markets: Bull markets are punctuated by corrections; the long-term trend remains up.
• Buying opportunity: For long-term investors, corrections offer chances to buy before the market recovers.
• Shakeout: Corrections can shake out weak hands (panicked sellers) before the market resumes higher.
• Valuation reset: Corrections can reset valuations after rapid runups, making subsequent gains more sustainable.
• Frequency: Corrections are common; the S&P 500 typically experiences 1-2 per year.

Limitations

• Sometimes corrections morph into bear markets; it's hard to tell during the decline.
• Corrections can be psychologically painful for investors; a 15% decline feels bad even if temporary.
• Trying to buy "the dip" during a correction can backfire if the decline worsens into a bear market.
• Technical support levels don't always hold; a correction can breach support and accelerate downward.

Related Terms

• Bear Market — decline of 20%+ from peaks
• Pullback — mild correction of 5-10%
• Bull Market — longer-term uptrend despite occasional corrections
• Volatility — price fluctuation; corrections are part of normal market volatility