With investors having enjoyed a rally of about 15% since the middle of July, traders effectively announced on Monday that it is time to take a break. Without any real downside trigger – other than Japan’s GDP “missing” expectations by 0.1% and a pretty crummy day in China – stocks got tagged for big losses on Monday. And, just like that; it seems that every talking head on television is suddenly telling us that a meaningful correction is now underway.

If you detected a hint of sarcasm in that last line, give yourself a gold star. As long-time readers are no doubt aware, we are not fond of the folks who live and die by their ratings appearing to offer up expert advice on the direction of the market; when in reality they are more often than not simply worshiping at the altar of price momentum.

China's Shanghai Composite Index was a major sore spot for the bulls on Monday as the index posted its biggest single-day percentage drop since November, falling 5.8%. The ongoing decline is in response to worries that the government will begin to make investing in stocks more difficult in an attempt to prick a potential bubble before it gets out of hand.

However, corrections are part of the game of investing in stocks and a correction is what is happening in Shanghai. To put things in perspective, after today’s drop, the S&P 500 is up about +8.5% for 2009. However, the Shanghai Composite is up something more on the order of +65%. Thus, a correction in China makes some sense and does little if anything to change the fundamental story there.

Now let’s turn our attention to Japan, which was another excuse du jour offered up by the bears as a reason stocks got whacked on Monday. The good news is Japan’s GDP moved into positive territory last quarter. But unfortunately, the gain in GDP was at a slightly slower than expected pace. Japan’s GDP increased +0.9% in the quarter, which was a tenth shy of the consensus for an increase of +1.0%. However, let’s remember that the prior quarter’s result was -3.1%. So, while we fully “get” that this game is all about expectations vs. reality, let’s just say the panic over that 0.1% might be a little overdone here.

Speaking of panic, is it time to throw in the towel on the stock market and head for the hills? In short, we believe that the market is currently discounting better times ahead. And while the rally may have gotten a little ahead of itself, the bottom line is the economy is indeed in recovery mode. Therefore we wouldn’t start digging the hole in the back yard just yet.

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