We awoke this morning to see futures deep in the red. Over the past two weeks, markets seem indecisive, unable to make much progress. Lots of days began with positive trades, only to roll over and fall into losses. Several days that began in the red closed negative, though usually off their worst levels. Last week’s big ugly Monday is still fresh in many traders’ minds.

Might this be the start of the long-awaited, overdue correction?

There certainly have been plenty of catalysts that could hasten a 10 percent drop or worse. Earnings season has begun rather inauspiciously. There have been several high profile disappointments -- IBM, Best Buy, Intel and Citigroup come to mind.

On the other side of the world, China is slowing, with January manufacturing Purchasing Managers' Index falling to a 6-month low and breaking 50 (49.6). New orders, exports, employment and backlogs all showed declines. On top of that, HSBC reports that China continues to face a cash shortage within its financial system (why does that sound so familiar?).

All this takes place against the backdrop of the U.S. Federal Reserve taper. The first step toward removing the bond-buying program was put into place last month, with the next step possibly coming as soon as the two-day Open Market Committee meeting next week. An unusually accommodative monetary policy is beginning to come to the natural end of its unnatural life. Indeed, the degree of stimulus has been so enormous that it might take three full years or even longer to fully unwind it. Congress has exhibited no interest in post-recession fiscal stimulus -- unlike in prior recessions -– so perhaps the FOMC ‘s slow withdrawal is a mixed blessing.

As of this writing, the Dow and Nasdaq are off ~1 percent, with the S&P 500 down about three-quarters of a percent.

The key question on investors’ collective mind is whether or not this is the end of the bull cycle that began in March 2009 and is now spitting distance from five years old. (I shall hold off on opining on the thesis that a greater than 20 percent correction took place in the summer of 2011 -- an intraday peak-to-trough fall that barely registered more than 20 percent for a few milliseconds -- with the implication being the bull market is not five years old, but is instead a mere two.)

The bad news is, we are long overdue for a pullback. As we discussed earlier this week, we have gone more than 400 days without a correction. When I wrote “A 10 percent correction ... seems like a pretty decent bet” I did not mean within 48 hours.

The good news is that market internals continue to be constructive. We do not see the usual indications that typically accompany the end of a bull market (see this previous discussion on breadth).

Lowry Research notes the signs that typically accompany market tops are not present. They point to the current ratio of new highs/new lows as similar to “what typically occurs in maturing bull market rather than an imminent market top.” So too has the advance/decline line failed to diverge from the market advance. This is yet another internal sign of market health, and that divergence is often seen prior to major tops.

S&P 500 (top) and NYSE stocks only advance-decline line (bottom). Source: BofA Merrill Lynch
S&P 500 (top) and NYSE stocks only advance-decline line (bottom). Source: BofA Merrill Lynch

Hence, it is much more probable that we are looking at a correction, and not the end of the bull market.

Market internals and identifying tops is a complex and fascinating subject, one that I plan on addressing in a greater detail in the coming weeks. By then, we will know if this is a minor correction of less than 10 percent, a more significant correction of 10 percent to 20 percent, or something even more serious. My bet as of right now is a 10 percent correction. If it is anything more significant, it should show in market internals before too long.

In the meantime, the Chicago Board Options Exchange Volatility Index is still under 14. I expect that to begin to move higher.