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Wall Street is a complex and ever-changing entity, influenced by many factors such as the Federal Reserve, economic conditions, geopolitical events, and investor sentiment. While stocks can experience long streaks of price appreciation, corrections are a natural part of the market cycle. As the old saying goes, "Without pain, how could we know joy?"
Correcting through Price Versus Time
A correction through price tends to be a dramatic and sudden drop more times than not. The suddenness and velocity can lead to a domino effect, where falling prices cause more selling in what ultimately becomes a "self-fulfilling prophecy" of sorts. In early 2022, this phenomenon gave way to a correction through both price and time.
Conversely, when the stock market corrects through time, it usually means that the price is relatively stable, but the market experiences a brief period of consolidation or sideways price movement. During this time, investors may become hesitant and uncertain, leading to a dry-up in volume and a sideways price chop. Though a correction through time frustrates investors, it can be an essential building block for higher prices later.
Corrections through time are evidence of a more robust market. 2022 was indicative of an equity market that required a large correction or reset. Meanwhile, thus far, the current correction is more a sign of a pause in an uptrend.
Navigating Pullbacks
Market corrections are a normal part of the investing cycle and can often be short-lived. Regardless of whether a correction occurs through time or price, investors need to remain calm and avoid making impulsive, emotional decisions. Below are 3 tips on how to navigate a market correction:
Ask yourself, "What stocks are holding up best?": Relative strength is the most effective yet simple indicator at an investor's disposal during a correction. Think of a strong relative strength stock as a beach ball being held underwater. You can only hold the ball down for so long before it springboards back to the surface. Semiconductor leader Rambus was a prime example of relative strength in September 2022. In the yellow box on the chart below, notice how RMBS was hitting new highs while the S&P 500 Index was weak and retesting lows. Because 3-4 stocks tend to follow the market direction and RMBS didn't, the action was noteworthy.
Follow the Leaders: Leaders, or stocks that have been moving up the most in an uptrend are called leaders for a reason – they lead. Presently, tech, specifically semiconductors, are the leading stocks in the market. Innovative chip maker Nvidia is among the "cream of the crop" when it comes to true market leaders.
As such, regardless of whether or not you caught this year's breathtaking move in the stock, it bears watching. NVDA is pulling into trendline support and the 21-day moving average for the first time in 2023. If it can hold this zone, the correction may be short-lived. If the stock breaks this zone, the correction likely has longer to go.
Other leading stocks to watch for more evidence include mega-cap tech stocks such as Microsoft, Apple and Netflix.
Know your timeframe: Before a correction occurs, and before you decide to invest in the stock market, for that matter, you should be acutely aware of what you're willing to risk and your time frame. In this case, there is no right or wrong answer. However, your time frame should lead you to how you handle corrections. For example, a long-term investor should be able to take a 5-10% correction in the S&P 500 Index in stride. On the other hand, swing traders may need to stop themselves out of some positions in that case and readjust their portfolio. Either way, investors should prepare and have a clear-cut strategy ahead of time.
Conclusion
Price pullbacks are often thought of in a negative light by investors. However, as we explained above, they are a necessary ingredient for the market and can help lead the way for the next market move higher. To succeed, investors should stay calm, informed, and enter corrections with a clear action plan.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: Rambus, Nvidia, Microsoft, Apple and Netflix
For Immediate Release
Chicago, IL – April 14, 2023 – Today, Zacks Investment Ideas feature highlights Rambus (RMBS - Free Report) , Nvidia (NVDA - Free Report) , Microsoft (MSFT - Free Report) , Apple (AAPL - Free Report) and Netflix (NFLX - Free Report) .
2 Types of Corrections, 3 Ways to Navigate Them
Investors Should Welcome Pullbacks
Wall Street is a complex and ever-changing entity, influenced by many factors such as the Federal Reserve, economic conditions, geopolitical events, and investor sentiment. While stocks can experience long streaks of price appreciation, corrections are a natural part of the market cycle. As the old saying goes, "Without pain, how could we know joy?"
Correcting through Price Versus Time
A correction through price tends to be a dramatic and sudden drop more times than not. The suddenness and velocity can lead to a domino effect, where falling prices cause more selling in what ultimately becomes a "self-fulfilling prophecy" of sorts. In early 2022, this phenomenon gave way to a correction through both price and time.
Conversely, when the stock market corrects through time, it usually means that the price is relatively stable, but the market experiences a brief period of consolidation or sideways price movement. During this time, investors may become hesitant and uncertain, leading to a dry-up in volume and a sideways price chop. Though a correction through time frustrates investors, it can be an essential building block for higher prices later.
Corrections through time are evidence of a more robust market. 2022 was indicative of an equity market that required a large correction or reset. Meanwhile, thus far, the current correction is more a sign of a pause in an uptrend.
Navigating Pullbacks
Market corrections are a normal part of the investing cycle and can often be short-lived. Regardless of whether a correction occurs through time or price, investors need to remain calm and avoid making impulsive, emotional decisions. Below are 3 tips on how to navigate a market correction:
Ask yourself, "What stocks are holding up best?": Relative strength is the most effective yet simple indicator at an investor's disposal during a correction. Think of a strong relative strength stock as a beach ball being held underwater. You can only hold the ball down for so long before it springboards back to the surface. Semiconductor leader Rambus was a prime example of relative strength in September 2022. In the yellow box on the chart below, notice how RMBS was hitting new highs while the S&P 500 Index was weak and retesting lows. Because 3-4 stocks tend to follow the market direction and RMBS didn't, the action was noteworthy.
Follow the Leaders: Leaders, or stocks that have been moving up the most in an uptrend are called leaders for a reason – they lead. Presently, tech, specifically semiconductors, are the leading stocks in the market. Innovative chip maker Nvidia is among the "cream of the crop" when it comes to true market leaders.
As such, regardless of whether or not you caught this year's breathtaking move in the stock, it bears watching. NVDA is pulling into trendline support and the 21-day moving average for the first time in 2023. If it can hold this zone, the correction may be short-lived. If the stock breaks this zone, the correction likely has longer to go.
Other leading stocks to watch for more evidence include mega-cap tech stocks such as Microsoft, Apple and Netflix.
Know your timeframe: Before a correction occurs, and before you decide to invest in the stock market, for that matter, you should be acutely aware of what you're willing to risk and your time frame. In this case, there is no right or wrong answer. However, your time frame should lead you to how you handle corrections. For example, a long-term investor should be able to take a 5-10% correction in the S&P 500 Index in stride. On the other hand, swing traders may need to stop themselves out of some positions in that case and readjust their portfolio. Either way, investors should prepare and have a clear-cut strategy ahead of time.
Conclusion
Price pullbacks are often thought of in a negative light by investors. However, as we explained above, they are a necessary ingredient for the market and can help lead the way for the next market move higher. To succeed, investors should stay calm, informed, and enter corrections with a clear action plan.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.