OT: Market Correction

Yep, IBD called it as suspected.

The selling in rising volume constituted distribution, the footprint of institutional selling. In another bad sign, the Nasdaq and S&P 500 met resistance at the 50-day moving average. The distribution-day count along with weak action in the indexes were enough to tip the market outlook to correction. That’s a poorer condition than the previous IBD outlook, which saw the market uptrend under pressure.

With the market in correction, individual investors should avoid stock purchases. Raising cash is prudent, and taking at least some profits makes sense.

The question individual investors need to ask now is this:

Are the stocks in the individual’s portfolio strong enough that the investor is willing to hold through turbulence or a base building?

The answer comes down to one word: conviction .

The stocks on this board are generally of high conviction by the holders. NVDA proved itself again after hours. Looks like SKX continues to improve. ANET holding strong. PSTG holding well.

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Today was very interesting, open up a few hundred, down 500 closed up 330. This morning I was telling my work colleague that what I want to see is a big down day where we finish at the top of the range, well that is what we got on very large Volume. Now what? I have a list of “Saul” stocks to add to, but also building a list for my shorter term growth style. For those I am looking for the stock market to have a follow through day, where on the 4-7th day from now we get another big up day on strong volume that signals the big buyers are back.

Here is today’s notes.

The Nasdaq and the Dow Jones industrial average posted gains of 1.4%, while the S&P 500 added 1.5%. The small-cap Russell 2000 rose 1%.

Volume was emphatically higher on the Nasdaq and on the NYSE as well.

The S&P 500 sank to its 200-day moving average and then bounced north, an early sign of a possible low. The Nasdaq came close to the line and then rebounded.

Although the indexes finished high in the day’s range, they marked fresh lows earlier in the session.

The correction has now reached 11.6% on the Nasdaq and 11.8% on the S&P 500 from prior highs.

How Long Will The Correction Last?
Going back more than three years and not including the current correction, the Nasdaq has had corrections of about 19%, 18%, 10% (rounded up) and 11%.

The deeper corrections lasted six to 10 weeks, while the shallower corrections ran four to six weeks.

Traditionally a correction is defined as a pullback of 10% or more, and a bear market 20% or more.

Watch for a follow through day…

A follow-through day involves a big index gain in rising volume on the fourth day or later of an attempted rally.

Friday’s action constituted Day 1 of an attempted rally. The indexes have to stay above their intraday lows in order for the count to continue.

In “How to Make Money in Stocks,” IBD founder William O’Neil made this cautionary point: “There will be cases in which confirmed rallies fail. A few large institutional investors … can run up the averages on a particular day and create the impression of a follow-through. Unless the smart buyers are getting back on board, however, the rally will implode.”

One thing investors can do while waiting for a new uptrend is cull the market for stocks with rising relative strength lines. The RS line measures a stock’s performance vs. the S&P 500.

Stocks currently with strong RS lines include Nvidia (NVDA), Mastercard (MA), Lockheed Martin (LMT), Hilton Worldwide (HLT) and Wingstop (WING).

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