Time and history are on the side of stock market bulls

NEW YORK -- Stocks are tired. They've come too far, too fast. They're due for a pullback. That's been the party line of Wall Street skeptics ever since the monster rally began in March.

So far, pundits calling for an end to one of the quickest, steepest climbs in stock market history have been wrong. The Standard & Poor's 500 index rebounded 1.8% Monday, ending a three-session skid. And while the market has suffered more than a dozen drops of 2% or more since the March 9 low, the biggest sell-off was a 7.1% dip from June 12 to July 10.

During that time, countless investors have remained on the sidelines, preferring to wait for a bigger correction before diving back into stocks. As a result, they've missed out on huge gains.

But the market's run without a drop of 10% is not unusual. In a report titled "Waiting for Godot," Carmine Grigoli, chief investment strategist at Mizuho Securities USA, notes that "meaningful corrections in the early stages of a bull market are infrequent events that usually occur one or more years after the markets turn up."

In eight of the 12 bull markets since 1949, the S&P 500 did not suffer a 10% fall until after the first year of the bull, Grigoli's study found. Four bulls did not suffer an official correction — a drop of 10% or more — for more than two years. In the 2003-07 bull, it took almost five years before a 10% drop.

In those 12 bulls, the S&P 500 posted average gains of 64% before a 10% drop, which occurred 24.1 months after the start of a bull. The current rally is almost 7 months old and has gained as much as 58.4%.

Grigoli interprets the data bullishly.

"Investors should ignore the correction chatter," Grigoli says. "It is distracting them from investment opportunities."

Grigoli argues that it takes a more significant event than simply saying stocks have gone up a lot in a short time span to cause stocks to plunge 10%. He notes that stocks are heading higher because market valuations are favorable, earnings are improving, and the economy is gaining traction.