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Small-stock index drops 10% from peak, first market gauge to cross 'correction' threshold

June 13, 2011 |  4:11 pm

The stock market’s spring pullback crossed another milestone Monday: The Russell 2,000 small-stock index became the first major market gauge to fall more than 10% from its spring high.

A drop of at least 10% is the threshold for a market “correction,” a term Wall Street uses to indicate a decline that’s significant but not serious enough to call the end of a bull market.

It typically takes a decline of more than 20% for analysts to declare that the bull is dead and a new bear market has begun.

Rty613 The Russell 2,000 index (charted at left) slipped 2.34 points, or 0.3%, to close at 777.20. That left it down 10.2% from its record closing high of 865.29 reached April 29.

The broader market was mixed Monday. Blue-chip indexes, including the Dow Jones industrial average and the Standard & Poor’s 500, managed tiny gains. The Dow inched up 1.06 points, or 0.01%, to 11,952.97 -- only its second positive session this month. Ditto for the S&P 500, which added 0.85 of a point, or 0.07%, to 1,271.83.

The Dow and the S&P got a lift from a rally in battered financial stocks, which offset another decline in energy issues. Major oil stocks fell as U.S. crude prices dropped to their lowest levels since May 17. Near-term futures in New York lost $1.99 to $97.30 a barrel on fresh worries about the global economic outlook.

Deflating expectations for economic growth have dragged stocks lower almost across the board since the end of April. Through last week the Dow was down six straight weeks, the longest losing streak since 2002 -- when that era’s bear market was ending.

Dow613 But this decline has been relatively modest, at least for big-name stock indexes. The Dow (charted at right) is down 6.7% from its multiyear high reached April 29; the S&P 500 also is down 6.7% since that date.

Rather than exit the market entirely, some investors have been doing classic “sector rotation”: They’re selling stocks of companies whose fortunes are closely tied to the economy’s health (industrial and retail issues, for example) and channeling that money into “defensive” stocks whose businesses tend to hold up better when the economy falters. Defensive industries include pharmaceuticals, utilities and packaged foods.

It’s not surprising that the Russell 2,000 index has fallen more than the Dow and the S&P 500. Small-company stocks typically are more volatile than blue chips, meaning they rise faster in strong markets and fall faster in weak markets.

During stocks’ pullback of the spring and early summer of 2010, which also was fueled in part by worries about slowing economic growth, the Russell index tumbled 20.5% from its April peak to its July low. Though that technically took the Russell into bear-market territory, the minus-20% mark was breached only for a day.

The Dow fell 13.6% from April 2010 to its low last July; the S&P 500’s decline in that sell-off reached 16% before the index hit bottom.

So as painful as this spring’s decline may seem, so far it’s the duration of the slide that is notable, not the size of the market's losses overall.

-- Tom Petruno


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