Could the Dow's Long-Awaited Correction Finally Be Coming?

Investors have gotten used to the idea that the Dow Jones Industrials and the rest of the stock market can climb almost in a straight line, with even the smallest of downturns inevitably followed by a quick recovery to new all-time record highs. Yet in recent months, market volatility has picked up. Now, investors are taking the plunge in oil prices seriously, and Monday morning's market action showed the nervousness among traders trying to analyze the possible impact on the broader market picture. As of 11:50 a.m. EST, the Dow was down more than 120 points, having given up a 120-point gain in the opening minutes of the session. With the Dow failing to sustain gains, more investors wonder if the Dow is finally setting itself up for a 10% correction -- something it hasn't seen since 2011.

Source: Flickr/Lindsey G.

Once again, oil-related stories grabbed most of the headlines Monday. OPEC's effectiveness as the world's major oil cartel has come under fire, and so far, the group of oil-producing nations hasn't come to any consensus about whether it will make any production cuts in response to the plunge in crude prices. With the price of West Texas Intermediate crude falling below $57 per barrel, many energy traders expect further declines until the supply and demand picture markedly changes.

Yet looking at the biggest movers in the Dow, investors are looking beyond oil stocks to express their concerns about the market's overall health. General Electric was the Dow's worst performer as of mid-morning, falling more than 1.5% despite getting good news from fellow Dow component Boeing . Boeing picked GE's aviation business to provide flight recorder and key central-processing avionics for its 777X aircraft, giving the conglomerate even more of a presence in the aerospace industry. Yet much of General Electric's growth in recent years has come from the energy sector, both through oilfield services for traditional oil and gas production and through products and services related to numerous forms of alternative energy. If low oil prices create new obstacles to the expansion of solar, wind, and other renewables, then GE could need to work even harder to re-establish its diversity across other industrial sectors beyond energy.

Financials also performed badly, with JPMorgan Chase and American Express both falling more than 1.5%. Because of the rapid expansion in the energy sector, many oil and gas producers sought out and received massive loans from major financial institutions, and banks have increasingly had trouble finding partners with which to spread the risk. Now, some of those energy-related loans look a lot like the "toxic assets" from the mortgage meltdown and financial crisis of 2008, with institutions having difficulty finding much liquidity. If the trouble from the energy sector spreads into the financial system, then it could end up affecting the economy as a whole to a much greater extent than many would have thought possible. That in turn could be the catalyst that sends the Dow to an even larger decline than the roughly 8% drop between mid-September and mid-October.

There's no guarantee that a Dow correction will happen this month. But corrections are something that any long-term investor has to get used to enduring, and they typically occur much more frequently than they have in recent years. Smart investors know that a correction can often be the best time to make great investments. If you take the time to make a list of promising stocks now, then you'll be ready to pounce when the long-awaited stock market correction finally comes.

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Dan Caplinger owns shares of General Electric Company. The Motley Fool recommends American Express. The Motley Fool owns shares of General Electric Company and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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