The market has given back all of its gains from last Friday’s bounce, and as I am writing this I see we lost that key 1294 area that dates back to at least 02/24. Breadth is pretty soundly negative, despite some good action in many of the solars, a group that I profiled over the weekend as potentially being the first sector to bottom. Other than that, it is awfully tough to put on swings for longer than a day or two at most, particularly when we see the Russell 2000 small cap index struggling with its 50 day moving average as newfound resistance.
The bottom line is that the price action we are seeing is that which is most closely associated with a correction. It is no reason to panic, but it does merit strong caution and an increased focus on protecting capital for the time being. Another issue I see with this market is that we simply had too many bulls, even after last Thursday’s bloodbath, who complacently and arrogantly argued that just buying low and selling high was the key to getting rich. The reality is that before this correction is over, a fair amount of those bulls will be punished and even converted into bears.
Rather than hunkering in and taking the pain of a correction, the better approach is to step aside and make a cogent list of names holding up well, showing relative strength. It is also constructive to watch for sectors that become too extended to the downside and are showing bonafide signs of bottoming.
