As of the market open today, tech stocks (e.g. the NASDAQ 100 fund QQQ) are down more than 10% from their recent highs. The broader S&P 500 fund SPY is down about 8%. Hands are wringing…what does it all mean?

By applying standard definitions, we can know exactly what it means:

A pullback is a market drop of 5-10% and is very short term.  It is a dip from a recent high during an ongoing bull market while upward momentum is still intact, and is a normal adjustment to a market cycle.

The market is in “correction phase” after a drop between 10-20% and can last a few months. These moves are typically met with higher volatility.  Corrections can be violent as investors’ fear levels rise and panic selling may hit the market.

Real time news and social media can intensify this fear as investors may follow the herd mentality.   The average market correction lasts anywhere between two and four months and is frequently accompanied by adverse market conditions.  However, corrections are often seen as ideal times to buy high-value stocks at discounted prices.

So, technically, the S&P has experienced a “pullback”, while the NASDAQ 100 has undergone a “correction”. Just to round out the infernal trinity of market moves with a definition of a “bear market”:

A bear market occurs after a drop of 20+% over at least a two-month time frame.  In a bear market, investor confidence has been shattered and many investors will sell their stocks for fear of further losses.  Trading activity tends to decrease as do dividend yields.

Bear markets tend to become vicious cycles when rallies are sold and not bought This happened in 2000 and 2007 and can typically be seen on charts as the market makes lower lows and lower highs.  Bear markets tend to occur in the contraction phase of the business cycle and last, on average, approximately 16 months.

You don’t know if you are really in a bear market until things get really bad, at which point it is probably too late to sell. (Amateurs get discouraged and sell AFTER stocks have dropped, which is why the average investor does appreciably worse than the accounts of dead people where stocks just sit there without being traded). When stocks recover at least 20% following a bear market over at least a two-month period, that is defined as the start of a new bull market regime.

Having a correction (i.e. 10-20% dip) in the middle of a bull market year is pretty normal. Although whole-year market returns have been positive for 34 out of the past 45 years, the typical year experiences a correction averaging 14%.

None of this vocabulary clarification answers the practical question of how bad will the current pullback/correction get? As usual, I read argument on both sides. The bears are saying (a) what they have been saying since 2018 or so, that the market is unrealistically overvalued, and (b) the macroeconomic world is about to fall apart, which they have also been saying for years. This time may be different, with the new administration’s erratic policies, but history shows that so far, the market is not much correlated to who is in the West Wing.

The bulls are saying (a) the market values did get run up unrealistically after the election and with AI hype, so the current pullback is just a healthy reset to a level for resuming further market growth, and (b) despite negative talking, the actual numbers show decent employment and GDP, so macro is OK (and it is very rare to have an actual bear market absent a serious bad macroeconomic driver).

If I really knew the answer here, I would be writing this from my private Caribbean island. But I’ll share how I am playing it. For the past 15 years or so, it has nearly always worked well to buy in after a say 10% correction. What seemed so gut-wrenching and scary at the time almost always turns into just a blip on the endlessly rising market charts in hindsight.

I had set aside some “dry powder” funds specifically to take advantage of buying opportunities like now. So, I am manfully mastering my fears and buying small amounts every couple days of 2X levered funds like SSO and QLD. (See here for discussion of such funds, they go up or down $2 for every $1 the underlying S&P or NASDAQ go up or down, so it’s kind of like being able to buy twice as much stock for the same dollar amount. But as usual, caveat emptor).

But I am not going all-in on any particular day. It is always frustrating to miss buying right at the bottom, but nobody rings a bell there, either. I have searing memories of March 2020 and of 2008 when just when you thought the bottom was in, it dropped out the next day or week.

Disclaimer: Nothing here should be considered advice to buy or sell any security.