Gluskin Sheff analyst David Rosenberg says the retesting process is here, and he lays out some of the action we're likely to expect.

Over the last year, we have seen four other testing phases

and they all failed as the market did break to new lows. Under the proviso that

the S&P 500 hit an interim peak of 946 back on June 12 (it’s down over 5%

since), here is what the recent historical record tells us to expect (at a minimum,

take profits).



• The average length of the testing phase is 53 calendar days and 38

business days (versus 45 calendar days and 33 business days for the

interim bear market rallies).

• On average, the S&P 500 undergoes a correction of more than 20%.

• The sectors that led during the rally, corrected most during the selloff. This

means that financials, consumer discretionary, materials and industrials

should underperform in the next few months, while health care, consumer

staples, utilities and telecom services should emerge as the leaders.

• Market volatility more than doubles, on average.

• Bonds rally, with the 10-year Treasury note yield down nearly 15 basis

points, on average.

• The flight-to-safety during these periods implies that the Canadian dollar

declines (on average by 10%), while the trade-weighed U.S. dollar rallies

more than 6%.

• Commodity prices decline an average of 15%, again as cyclical trades

unwind.

• Corporate spreads (Baa) widen an average of more than 60 basis points; it

is very important to be focused on high-quality paper during these market

testing periods as high-yield spreads widen, on average, by more than 300

basis points (and keep in mind the vast outperformance, which is typical

during bear market rallies).