With the market “in correction” and heading lower today, we’ve received numerous calls regarding “what’s next?” To address those questions, we’ve outlined a number of relevant guidelines to follow during any market correction:


 1. Our goal is to avoid market corrections. Monitor the distribution day count to know when a downtrend is developing. This approach takes a little getting used to, but it can protect your portfolio when a minor correction turns into a more serious downtrend—or Bear Market.  We never know how far down the market will go until it starts a new uptrend. 

 

2. The rule is to be out of the market when it is in correction. Look at your portfolio’s holdings by examining the weekly chart. How are your individual stocks acting? Where are they on the chart? Are they near logical areas of support or do they look like they have “an open area” on the chart to fall further?  If they’re acting well and you have a profit cushion on the position, then you can consider trying to hold them through this period of weakness or lighten up to mitigate any further downside exposure. Be careful, during corrections, even the best stocks can get hit. It’s best to have predetermined price points where you will sell, no matter the strength of the fundamental story.


 3. What next?  Watch the market’s leading stocks. Are they breaking through support levels (e.g. 50-day MA or consolidation areas) on heavy volume or are they pulling back to their buy points on light volume? Do they look like they are resisting the downtrend? Since the strongest stocks tend to outperform the general market and their peers during a corrective market, this is the perfect opportunity to look for the next cycle of leadership. This is the time where the best stocks will fight the downward pressure of the market and rise to the top. Look for stocks with high RS Ratings, RS Lines at New Highs and solid earnings and sales growth. Here are two MarketSmith Screens to use as a starting point to identifying the current best price performers and potential next round of leaders:


RS Line New High, Correction Webinar

 

Daily % Change Screen, Correction Webinar

 


To access the shared MarketSmith screens, go to the Screener and click Browse at the top left. Next, click the MarketSmith link at the bottom left of the new window to see all of the shared MarketSmith screens. 

 

 

For a more in-depth explanation of how to handle a correction, watch this webinar I recorded with our product coaches last year on this very subject:

 

http://www.marketsmith.com/Learn/webinar/archived/652584/WhyMarketSmithsLoveCorrections

Best returns,


Scott O’Neil

President

MarketSmith Incorporated

Follow Scott O'Neil at Twitter.com/WScottOneil