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The market is in correction. There is a clear divergence
between the Nasdaq, the index we focus on, and the S&P500, as investors
have shifted away from growth stocks. Not only is the Nasdaq below its 50 DMA,
but leading stocks are well off their highs.
It is amazing how quickly the market's character can
change. Only weeks ago, the leaders were hitting new highs every day. Now, with
few exceptions, those same leaders are well below their respective 50 DMAs.
This abnormal action from the leaders forces us to maintain a more cautious
stance. Look at the Nasdaq on a weekly chart, and you’ll notice we haven’t had
an intermediate correction since January 2013. From that standpoint, we’re
overdue for a break.
Over the last several weeks, there has been a tremendous
amount of sector rotation out of growth stocks, particularly in the Biotech
sector. Rotating into favor has been the energy sector, which is showing signs
of strength. I ran a RS Line New High screen at the IBD Level 2 Workshop in
Dallas over the weekend, and most of the names from that screen were in the
energy sector. However, I’m not moving my own portfolio into these names,
because of the current market direction and the fact that the energy sector is
difficult to trade.
Market direction is the #1 most influential factor in
making progress, so I’m waiting for a follow-through day to tell me it’s safer
to start increasing portfolio exposure. On that day, I’ll be looking for stocks
with great fundamentals breaking out of proper bases.
While most investors choose to tune out during a
correction, I do the opposite. I tune in quite closely because corrections are
very valuable for revealing the true leading stocks: Those that try to fight
the general market's direction. So the best way to get ready for the next
uptrend, whenever that may be? Run screens to find those that hold up best
against the correction.
Follow Scott O'Neil at Twitter.com/WScottOneil
Scott: you wrote: "Run screens to find those that hold up best against the correction."
Can you give us the screen parameters you use in the screening process you are recommending? Are they screen that are pre-configured in MS already, and if not, what screening settings do you recommend.
@saltman, I track a screen called "RS Line New High, Correction Webinar" and "Daily % Change Screen, Correction Webinar". The idea being that during a correction, we want to identify stocks that are holding up better than their peers. From these, we can see the new leaders emerging that will power the next uptrend.
SF--thanks, I think you helped me find those screens back when they had that webinar. I did save in my tracked screen folder, so I will start keeping an eye on those--which does not take long as there are only about 10 stocks on each screen.
I watched that webinar again and recommend everyone doing so. If you have not seen it, do not wait another minute. Stop whatever you may find yourself doing and click on this link: www.marketsmith.com/.../WhyMarketSmithsLoveCorrections
Watch and re-watch again. You will easily take away one of the most valuable lessons in the stock market: CORRECTIONS ARE OPPORTUNITIES!
Thanks SF. Watching it right now.
Thanks I will watch the webinar right now. That's great
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