Like many previous sell offs, this one fizzled out on second day. Even though there was no immediate bounce, there was also no major pressure on the downside. There were 106 stocks down 4% or more on high volume. But there were 87 stocks up. In serious corrections the number of down movers is in range of 250 plus for first 2-3 days of selling. So market might attempt a bounce back in next couple of days.
Your views about the market are largely formed by your trading time frame , your structural understanding of market , and the kind of things which you monitor on day to day basis. The technical analysts view is largely formed on their structural paradigm of support and resistance. In the Investor Business Daily CANSLIM approach, the market direction is determined by number of accumulation or distribution days in last defined period.
My view of the market is determined by my understanding of momentum stocks, earnings, the number of signals generated on various scans, and number of profitable trades in a defined period. Prior to the correction in last 6 weeks I had disproportionally more number of profitable trades. Which itself indicates at some stage there is going to be exhaustion of the move for at least some period. Momentum is cyclical.
Stocks which are beneficiaries of momentum are also victims of it once the mood shifts. Momentum cuts both ways and once it turns the downside can pick up steam quite quickly. Playing momentum requires a thorough understanding of the different phases in momentum. If you don't exit a momentum stock quickly at first sign of danger after making a significant move, you soon discover that the downside momentum in such stocks feeds on itself. I see lot of people trying to buy pullbacks or corrections in momentum names, probability of those moves working is low. Once a momentum stock finish its momentum phase, the stock may bounce but is primed to trade lower from there.
Some sector moves for variety of reason are over and they will continue to be in correction mode till a fresh catalyst can drive those sector higher. Casinos, technology,alternative energy some China and India play are in all such phase.The energy sector is a good example of how when the momentum party gets over, it is very difficult to get it going again. The energy stocks have struggled and have been unable to put together any decent size rally in spite of so many misguided bulls on energy, ethanol and alternative energy.
At least for me, I know from personal experience that high returns are possible by avoiding the correction or pullback phases. The kind of stocks which I buy have higher beta, so when market is in ideal momentum phase they do significantly better, same thing applies on downside. It is not very difficult for me to put capital back to work if I see market again moving in to profitable momentum phase. I have well oiled machinery which churns out opportunities on daily basis. The conveyor belts infrastructure still keeps humming. The scans and methods still remain valid, so getting back in to market is no big deal. Earnings still continues to drive stock behaviour and there are everyday earnings based breakouts. The earnings season is still going on.
Flexibility is tremendous advantage for small speculators. Institutional Investors have a structural disadvantage due to their large size. They manage gigantic sums of money, and as a result, cannot move quickly in and out of their positions. That is the reason for the constant mind altering advise and marketing from the mutual funds to not time the market. So the mental modeling script is to drum in to investors head that you must sit tight and ride things out, do not time the markets.It is smart marketing from their perspective. You can listen to that message or raise cash and move to the sidelines at a moment’s notice and wait for the next opportunity.