What a whirlwind! Let me tell you.
The stock market went through days of wild volatility. It ended lower on Friday than the week before.
Do you know what causes this?
The profit-taking from the technology and healthcare sectors hurt Nasdaq by 2%. S&P 500 Russell 2000 (0%) was the least fazed by the market action followed by Dow Jones (-0.2%) and S&P 500 (-0.6%).
But it was not all gloom and doom.
The financial sector was an exception. It ended its four-session losing streak with a gain of 0.5%. European Central Bank provided an upbeat assessment of Eurozone inflation and growth trends.
It was also after the U.S. banks beat the Federal Reserve's need for capital stability in an annual stress test. It is to see how their financial positions would behave in worst economic scenarios.
Ok, what can you expect next week?
The market will be quiet. It'll continue until the Federal Reserve releases its June meeting minutes. It’ll provide more details about its plans to reduce the size of its balance sheet. It includes trillion dollars of loans. And the announcement results in more market volatility in the short term.
Next, let us dive further.
The following charts and diagrams will prepare you for the current market condition.
Here are the daily charts for the 4 market indices.
For weekly charts, this is how the market indices fared.
And, finally. Let us review how the market is behaving in a long term monthly charts.
All signs are pointing that the market will eventually experience a correction. No one knows how severe it'll be. In the chart above, it shows that the number of stocks above the 200DMA line is generally declining since its peak in February 2017. Stocks that are above the 200DMA are deemed to be bullish while those that are below are considered bearish.
The 'doomed' market correction is underway. Like the old saying goes "what goes up must come down.”
The whipsaw action of earlier the week made that clear. The price volatility leaves the intermediate-term trend of the market bearish. And because of this, you’re left with a single question: What do you do now?
There are two ways for investors to deal with a new market correction like this.
First is to completely cash out your portfolio and wait for the market to turn around. It guarantees that you’ll have the cash to jump into the market when it recovers again.
It also lets you watch the correction without worrying if more stocks hit lower highs and lower lows.
The problem with cashing out is you'll not be in the best position to take advantage of new uptrends. Neither you nor I know when the correction will stop and stocks move higher again. So, to completely cash out means that there won’t be any gains made in the next few months.
Here's the second option to deal with a market correction. Sell your weakest stocks when the market trend turns but let your strongest stocks ride. If the market is weak, then protect your portfolio gains is a good idea. Holding onto your best stocks also gives you an advantage of the next uptrend in the market.
These are the two methods of protecting your gains in a market correction. Choose one that fits your risk tolerance than anything else.
One more thing. No matter how you deal with a market decline, the best thing you can do is stick with the system that works for you.