The 10% & 20% Correction Levels Are Completely Irrelevant

I'm not really sure who came up with these numbers. But every time we have any sort of market correction, whether it be in stocks or Gold or anything that moves, the 10% and 20% numbers are brought up in the media. But don't be confused, these numbers are completely irrelevant when it comes to the supply and demand dynamics of the market.

We've all heard it before, "XYZ enters into bear market territory". Why is it now in a bear market? Because it's down 20%? So when it was down 19% it wasn't in a bear market?

How about the old, "XYZ is no longer in bear market territory". Why? Because it was down 21% and now it's only down 19%? Come on.

Tom Brakke who writes The Research Puzzle Blog had a nice piece in the Wall Street Journal last week where he dismisses this concept of 10 and 20%, which are just random round numbers that make the math easy:

TOM BRAKKE: Somewhere along the line, people started proclaiming “bull markets” and “bear markets” (and “corrections” too) and defining them with specific percentage moves. It is ridiculous.

If anything, with the promotional nature of financial journalism today, you see more and more headlines like, “Stocks Move into Bull Territory” or “Market Flirts With the Bear.”

Here’s a hint: It means nothing that a market is up 19% versus 21%. Don’t let the terms convince you that something has changed or that your behavior should as a result. Nobody rings a bell for a bull or bear market–and they certainly don’t become official after a specific percentage move.

There are some retracement numbers that have actually proven to impact supply and demand. Some of those are Fibonacci retracements like 38.2% and 61.8% from their previous trends. But the randomness of 10 and 20% has zero statistical significance.

Don't let these random numbers get in the way of your analysis and judgement. They mean nothing. Literally nothing. It just gives people without any market exposure something to talk about.

Stick to your plan, and ignore these ridiculous definitions. They don't add any value.

Source:

What Do Bull and Bear Mean? Often Nothing (WSJ)