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The stock market 'correction' is here; now, who wants to buy?

May 24, 2010 |  5:30 am

When stocks were flying high just a month ago, the chance to get equities at 10% off -- a classic “correction” within a rising market -- would have thrilled Wall Street bulls.

Or so they said.

Now they’ve got their opportunity: After last week’s slump, most major U.S. stock indexes were down 10% or more from their April highs, measured through Friday.

That’s the biggest setback since the market began its rebound in March 2009 from the credit-crisis-induced plunge.

The Standard & Poor’s 500 index, at 1,087.69 on Friday, was off 10.6% from its 19-month high reached April 23. The small-stock Russell 2,000 index closed last week off 12.5% from its April high; the average New York Stock Exchange issue was down 12.3% from its recent peak.

Nysemay21 Of course, many stocks have fared worse than the averages. Measured from their spring highs, Bank of America is down 18%, Ford Motor is down 22% and U.S. Steel is off 32%.

Will buyers step up? The optimists of April now could invoke the wisdom of John Maynard Keynes as an excuse to stay sidelined: “When the facts change, I change my mind.”

The reasons to avoid committing new money to the stock market at this point are the same ones that have fueled much of the selling worldwide in May. Take your pick: the short- and long-term implications of Europe’s still-unfolding  sovereign debt crisis; new signs of strain in the global banking system; uncertainty over what the overhaul of U.S. financial regulation will mean for the economy and markets; and the growing risk of environmental and economic catastrophe from the Gulf of Mexico oil spill.

And understandably, for many would-be buyers the wild market volatility of the last few weeks, including the “flash crash” of May 6, is a deterrent that wasn’t in the picture a month ago. Who wants to risk being subjected to more of that pain?

Average investors no doubt are feeling vindicated for heavily favoring bonds over stocks for the last year. Still, barring another unexpected shock, the big-money players -- many of whom still are looking for growth, not just capital preservation -- may have to at least give stocks a look soon. They know that the mess in Europe is making it more likely that the Federal Reserve and other major central banks will keep money dirt-cheap for the foreseeable future. That underpins equity markets and also provides support for the economic recovery.

And if they missed buying Treasury bonds in the latest frenzied rush to safety, investors now are staring at yields that are much lower than seven weeks ago, and therefore relatively less attractive. The 10-year T-note yield was at 3.19% on Friday, down from 3.99% on April 5.

Historically, what has kept most stock market “corrections” from quickly spiraling into meltdowns is faith that the bullish story hasn’t changed all that much -- i.e., that the most important facts haven't changed. So what really should matter for many stocks in the near-term is whether new economic data and corporate reports support the idea that the U.S. recovery remains on track.

If the market can keep faith in that, it has a shot at stabilizing. But if recovery hopes fade amid (or because of) May’s barrage of depressing news, the bulls know they don’t have much else on which to build a case for stocks at these prices.

-- Tom Petruno

Photo: On the New York Stock Exchange floor on Friday. Credit: Richard Drew / Associated Press

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