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History Suggests the Current Decline Will Be Short Lived

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Does the decline in global equity prices that began on February 18 on unrest in the Middle East and North Africa, and exacerbated by the still-unfolding crisis in Japan, represent a buying opportunity?

Since the market’s peak on February 18, the “500” has dropped 6.4% as all 10 sectors and 123/129 industries are lower.

The best performing sectors since then: Utilities (-3.2%), Consumer Staples (-3.6), Health Care (-3.9), Telecom (-4.7), and Energy (-4.7). The worst performers since then: Tech (-9.4%), Materials (-8.1), Financials (-7.6), Industrials (-7.5), and Consumer Discretionary (-6.2). [Hat tip: Yardeni Research]

Cleve Rueckert of Birinyi Associates points out in a research note this morning that, since 1945, 5% declines that occur during a broader rally last an average of 41 days and decline 8.29%. If the averages hold, the S&P 500 will bottom at 1,232 on 3/31/11.

What is perhaps more encouraging, he says, is the fact that 5% declines do not usually result in a further 10% decline, and a bear market is even less likely. An initial 5% decline, such as the one beginning on 2/18/11, only results in a correction (10% decline) 33% of the time, and in only 11 of 106 instances has a 5% decline turned out to be a bull market top.

Additionally, the analyst notes, the S&P 500 and nine of ten sectors are now in oversold territory.

History suggests that the current decline will be short lived, and most likely presents a buying opportunity, Rueckert writes.
POSITION:  No positions in stocks mentioned.