Stock market correction sparks pessimism

The stock market is like a video game for many people providing them with great entertainment until they start losing, repeatedly. With a serious correction unfolding, how a portfolio is handled can make a difference that lasts for years. Here's something you can use to build your knowledge and skill to manage the unfolding of corrections in the stock market.

The chart below is not your heart rate monitor but it could be during moments of stock market anxiety. The put/call ratio is the relative volume of the purchases of equity puts to calls in the U.S. stock market. It can be a useful timing tool as spikes reveal extreme pessimism coinciding with declines in the stock market itself.

Notice how the put/call ratio is currently at .76. It's nowhere near the spike of .88 in early February during the stock market's one week "flash crash". But even then that level isn't as high as other times not only in the last five years, shown in this chart here, but throughout history.

Historically, the put/call ratio spikes to over 1.00 and typically 1.20 before stocks actually bottom out. The last time it was this high was December 28th 2015 well before the February 8th 2016 low.

There are other sentiment measures in the stock market including your own. Begin a process of establishing some kind of personal measure of your own sentiment and write it down for historical reference.

Use this for timing

Our markets research has found the number of stocks trading above certain trend lines (moving averages) has usefulness for predicting trend changes in the stock market.

During a correction the number drops, sharply, creating a low in stocks trading above the 50 day and/or the 200 day moving averages (m.a.). It reflects an increasing number of stocks entering down trends.

From the chart below you can see the market is essentially retesting the low from early February 2018. What is particularly noteworthy is how it reflects the nature of corrections. If you were watching at the time, recall the recovery following the early February flash crash in the stock market. Many believed it was a short term event and the market was back to business again but here's what matters in stocks. Power persists!

The rally through February and March featured some solid bullish action but cycles are relatively long in stocks. Big money, i.e. mutual funds and pension funds, can take many months, even years, to work through their process of buying or selling.

You don't have to get burned by the stock market. Try this.

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Watch for the next workshop here and send your interest to info@craveinvestor.com to be put on the notification list.

The struggle in the stock market

There are times when the stock market is in an up trend but the process of managing real money is a challenge. In fact sometimes it can be an outright struggle. The spring of 2014 was the start of a nearly two year long struggle and now we are in another similar battle.

One of the keys to success in an investment environment like this is to be vigilant about execution.Here's how it starts;

• Buy stocks undergoing a break out. The purchase price should, ideally, be within 5% of the break out price.

• Be willing to sell any stock that isn't working especially those that undercut the buy price. Don't wait for the loss to get large by selling it at no worse than a 6-7% loss.

• Sell stocks that undercut their 50 day moving average.

• Own only those stocks that qualify as leading stocks. This is not always cut and dry but many investors think they own good stocks when in fact there are literally thousands of other stocks that are higher ranked.

Use the guidance to lead you. If you don't have the time or you're striking out use the managed portfolio service. It's low cost and will, almost assuredly, produce better performance.

Another key to success is to be aware of the phase the market is in. A phase can be a few days or it can be a few months but in either case use that "big picture" view to keep the daily gyrations in context.

One day is rarely that important in the markets. Think of them as a series of sessions strung together in the trend and the process of making decisions with real money.