TSX correction detection back on

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With Canada's S&P/TSX composite index down about 150 points, or 1.2 per cent, in afternoon trading on Wednesday, it is close to erasing Tuesday's gains and marking a new low for the year. It also raises again the prospect of entering correction territory (defined here as a decline of 10 per cent based on closing levels). Right now, the index is down 9.3 per cent.

Interestingly, the TSX composite hasn't actually corrected since the stock market recovery began in March, 2009. The closest it got (again, using closing levels) was a 9.9 per cent decline in June and July, 2009. During last year's European debt crisis - not to be confused with this year's European debt crisis - the index fell a total of 9.7 per cent between April and July.

The S&P 500 has been considerably more volatile over the past couple of years. Last year, for example, it went deep into correction territory when it slid a total of 16 per cent between April and July. This time around, the S&P 500 is faring better than the TSX composite, with a decline of 7.1 per cent from its high in late April.

The difference between the two indexes comes down largely to exposure to commodities. Energy stocks within the S&P 500 have a 12.6 per cent weighting, but energy stocks with the S&P/TSX composite index have a 26.9 per cent weighting. Same goes for materials. They have a mere 3.6 per cent weighting within the S&P 500 but a 21.2 per cent weighting within the TSX.

The higher commodities exposure in Canada certainly hurts when these sectors are tumbling. Energy stocks have fallen 13.8 per cent from their high and materials stocks have fallen 15.4 per cent.