Why market may be setting up for a 20% correction

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A trader looks at his screen on the IG Group trading floor in London

A trader looks at his screen on the IG Group trading floor in London March 18, 2013. REUTERS/Neil Hall

Stocks could be setting up for a 10 percent to 20 percent correction, and the odds are good that it will be soon, according to Sam Stovall, chief equity strategist at S&P/Capital IQ.

Stovall has been expecting a 10 to 20 percent correction this year, but he says it's more likely to begin during the second quarter, based on historic market patterns. The S&P 500 was down 4 percent from its April 4 high in Tuesday trading.

"We've gone 30 months without a decline of 10 percent or more. The average is 18 months. It's just a matter of time," he said.

Stovall also says historically, corrections are likely to occur during midterm election years, when the declines have averaged 19 percent in the S&P 500. He also expects the year to end positively, and points to the average 10 percent returns in years after gains of 20 percent or more in the S&P 500 (^GSPC).

"The reason why I said a swoon before June is that the second quarter is by the far the worst of all quarters on both a price change and in frequency of decline basis since World War II for the S&P 500," he said. "None of which points to a guarantee, but simply in my opinion increases the likelihood some time in this second quarter."


He said midterm election years are more likely to see a decline in part because in the third year of a presidential term, the party in power is more likely to find ways to stimulate the economy. That also helps the economy in the fourth year, he said.

Even if there's a steep market decline, Stovall said the S&P typically recovers quickly. "We could see a 10 to 20 percent decline, but I remind people the best three quarters immediately follow the worst two. Declines of 10 to 20 percent-and we've had 19 since World War II-take an average of four months to get back to break even," he said.

-By CNBC's Patti Domm