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Last week, I made a video with four indicators to help you "buy the correction." On Tuesday, several of my indicators lined up and I started doing just that.
In this week's video, I review some of those indicators, including a key support zone I was watching on the Russell 2000 small cap index, or RUT.
The support zone goes back to the summer of 2017 where that index saw an all-time high breakout above 1450, which it subsequently retested last November.
What I keyed on for my followers was how the RUT stopped going down since last week's low close at 1470, while the Nasdaq was still under pressure as large fund managers crammed the exits to get out of Amazon (AMZN - Free Report) .
Here was the trade alert I gave my group Tuesday afternoon as the selling momentum subsided everywhere and we bought the Direxion Small Cap 3X Bull ETF (TNA - Free Report) ...
Three Questions to Call a Bottom
Predicting corrections is tough. But, thankfully, identifying bottoms is much easier.
My primary tools for doing this are the market breadth and over-sold indicators I show in the video.
So that kicks off my 3 questions to call a bottom...
1) Technical Analysis: "How over-sold are stocks/indexes, historically speaking?"
This means we are comparing the breadth data -- like the percentage of stocks above the 200-day moving average or the new highs vs. new lows calculations -- to prior corrections and bear markets/recessions.
Then I want to see if these extreme capitulation levels coincide with any meaningful support levels on the charts. In my work, I don't use arbitrary, non-mathematical "trend lines" drawn at angles to connect price highs/lows, but prefer what I call the more flexible "market memory zones."
This is just a way of asking "Where were there prior highs/lows and consolidation areas that market players will likely still view as a key battlegrounds and potential value zones?" That's what I did with the Russell 2000 in the 1450-1470 area as it coincided with (a) deeply oversold conditions and (b) a slowdown in panic selling.
2) Fundamental Analysis: "Where's the fire?"
By this I mean "What has put such a scare into large investors that lots are running for the exits at the same time?" Is economic/earnings growth slowing significantly? Are recession probabilities going up.
If the actual growth outlook doesn't justify the current "fire" in stocks, then instead of piling your own stocks into lifeboats, consider scooping some of those bargains out of the water that were thrown overboard by other investors.
NVIDIA (NVDA - Free Report) stands out as one growth stock that got thrown overboard as if the technology boom was about to come crashing down. I was guilty of this panic myself.
3) Behavioral Analysis: "What are the strongest hands doing?"
This is my way of getting into the heads of large money managers. Some are clearly running scared and selling either because they believe growth has peaked and valuations will get permanently wrecked, or because they are being forced to take profits by all their peers who are piling overboard.
But many savvy fund captains are more disciplined, more quantitative, and more calm at times like these. They run the economic numbers again with the latest data and projections and, barring an uptick in their recession forecast, they are licking their chops at all the juicy stocks on sale in a big valuation slaughter.
It's clear that large investors were not throwing Apple (AAPL - Free Report) overboard in this correction, as the stock could barely manage a close of 9% below its all-time high close made at $232 on October 3.
Along with the buyers coming into deeply oversold AMZN -- down over 25% from its highs -- this convinced me to buy the Nasdaq 100 index via the ProShares UltraPro QQQ 3X Bull ETF (TQQQ - Free Report) .
What About Sentiment Surveys?
Many sentiment surveys offer unique insight about market positioning and psychology. Even though it's "just words" vs hard data, it does give a contrarian glimpse at how crowded one side of the ship might be.
While there are many sentiment surveys of big fund managers that we don't get to see, we can approximate some of their general greed vs. fear using the Investors Intelligence newsletter data which has a 30-year sample set.
In September (when I was too early in calling for a correction), I wanted to see the overly-bullish numbers in that survey revert to the mean. For instance, the bull-bear ratio was over 3.25, with over 60% bulls and only 20% in the "correction camp."
I don't have this week's survey yet, but as of early last week -- notably, before the big market plunge on Wednesday October 24 -- the bulls were down to just 50% and the correction callers had climbed to 30%. I bet bearishness increased greatly in the past week, confirming the crowd moved even more to the other side of the ship.
How Did I Answer the 3 Questions?
As you might have surmised, I answered all three questions with a bullish conclusion on Tuesday. And I didn't need to be exactly right, buying the low, on the day of the bottom. Sometimes you get a dash of good luck on the side with your dish of good timing.
As I said in last week's video, I had a plan going into this correction to be a buyer of extreme fear in the "lower third" of the washout.
My view about how long this bottom could last? I give it a 65% probability of being the low for the next three months.
But that view could change in the next few weeks with new information or economic catalysts.
Right now, I just think that market players got too paranoid about an invisible growth slowdown and took the market down too far, too fast.
Maybe Thursday's ISM manufacturing survey shows that purchasing managers are growing worried about the economy and thus some paranoia about stock valuations is justified.
In any case, whether or not I see new data that changes my mind, I never get too rigid about my expectations, or too reactionary in my trading decisions.
As Benoit Mandelbrot and Nassim Nicholas Taleb taught us in the last decade -- before the financial crisis -- "wild randomness" rules markets and asset prices.
If you haven't read The Black Swan or The (Mis)Behavior of Markets, consider grabbing one of these for some winter reading.
I will give you my one sentence summary for how the bell curve “normal” distribution fails most financial practitioners in understanding, much less predicting, risk...
"Markets are social beasts full of wild randomness and when anything can happen, there is no standard for deviation."
While you can't always predict a correction or its depth, you can gauge when and where it is a terrific buying opportunity in a bull market. Keep this article handy for the next one.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader portfolio.
3 Medical Stocks to Buy Now
The greatest discovery in this century of biology is now at the flashpoint between theory and realization. Billions of dollars in research have poured into it. Companies are already generating revenue, and cures for a variety of deadly diseases are in the pipeline.
So are big potential profits for early investors. Zacks has released an updated Special Report that explains this breakthrough and names the best 3 stocks to ride it.
Image: Bigstock
Calling a Correction Bottom: 3 Questions to Ask
Last week, I made a video with four indicators to help you "buy the correction." On Tuesday, several of my indicators lined up and I started doing just that.
In this week's video, I review some of those indicators, including a key support zone I was watching on the Russell 2000 small cap index, or RUT.
The support zone goes back to the summer of 2017 where that index saw an all-time high breakout above 1450, which it subsequently retested last November.
What I keyed on for my followers was how the RUT stopped going down since last week's low close at 1470, while the Nasdaq was still under pressure as large fund managers crammed the exits to get out of Amazon (AMZN - Free Report) .
Here was the trade alert I gave my group Tuesday afternoon as the selling momentum subsided everywhere and we bought the Direxion Small Cap 3X Bull ETF (TNA - Free Report) ...
Three Questions to Call a Bottom
Predicting corrections is tough. But, thankfully, identifying bottoms is much easier.
My primary tools for doing this are the market breadth and over-sold indicators I show in the video.
So that kicks off my 3 questions to call a bottom...
1) Technical Analysis: "How over-sold are stocks/indexes, historically speaking?"
This means we are comparing the breadth data -- like the percentage of stocks above the 200-day moving average or the new highs vs. new lows calculations -- to prior corrections and bear markets/recessions.
Then I want to see if these extreme capitulation levels coincide with any meaningful support levels on the charts. In my work, I don't use arbitrary, non-mathematical "trend lines" drawn at angles to connect price highs/lows, but prefer what I call the more flexible "market memory zones."
This is just a way of asking "Where were there prior highs/lows and consolidation areas that market players will likely still view as a key battlegrounds and potential value zones?" That's what I did with the Russell 2000 in the 1450-1470 area as it coincided with (a) deeply oversold conditions and (b) a slowdown in panic selling.
2) Fundamental Analysis: "Where's the fire?"
By this I mean "What has put such a scare into large investors that lots are running for the exits at the same time?" Is economic/earnings growth slowing significantly? Are recession probabilities going up.
If the actual growth outlook doesn't justify the current "fire" in stocks, then instead of piling your own stocks into lifeboats, consider scooping some of those bargains out of the water that were thrown overboard by other investors.
NVIDIA (NVDA - Free Report) stands out as one growth stock that got thrown overboard as if the technology boom was about to come crashing down. I was guilty of this panic myself.
3) Behavioral Analysis: "What are the strongest hands doing?"
This is my way of getting into the heads of large money managers. Some are clearly running scared and selling either because they believe growth has peaked and valuations will get permanently wrecked, or because they are being forced to take profits by all their peers who are piling overboard.
But many savvy fund captains are more disciplined, more quantitative, and more calm at times like these. They run the economic numbers again with the latest data and projections and, barring an uptick in their recession forecast, they are licking their chops at all the juicy stocks on sale in a big valuation slaughter.
It's clear that large investors were not throwing Apple (AAPL - Free Report) overboard in this correction, as the stock could barely manage a close of 9% below its all-time high close made at $232 on October 3.
Along with the buyers coming into deeply oversold AMZN -- down over 25% from its highs -- this convinced me to buy the Nasdaq 100 index via the ProShares UltraPro QQQ 3X Bull ETF (TQQQ - Free Report) .
What About Sentiment Surveys?
Many sentiment surveys offer unique insight about market positioning and psychology. Even though it's "just words" vs hard data, it does give a contrarian glimpse at how crowded one side of the ship might be.
While there are many sentiment surveys of big fund managers that we don't get to see, we can approximate some of their general greed vs. fear using the Investors Intelligence newsletter data which has a 30-year sample set.
In September (when I was too early in calling for a correction), I wanted to see the overly-bullish numbers in that survey revert to the mean. For instance, the bull-bear ratio was over 3.25, with over 60% bulls and only 20% in the "correction camp."
I don't have this week's survey yet, but as of early last week -- notably, before the big market plunge on Wednesday October 24 -- the bulls were down to just 50% and the correction callers had climbed to 30%. I bet bearishness increased greatly in the past week, confirming the crowd moved even more to the other side of the ship.
How Did I Answer the 3 Questions?
As you might have surmised, I answered all three questions with a bullish conclusion on Tuesday. And I didn't need to be exactly right, buying the low, on the day of the bottom. Sometimes you get a dash of good luck on the side with your dish of good timing.
As I said in last week's video, I had a plan going into this correction to be a buyer of extreme fear in the "lower third" of the washout.
My view about how long this bottom could last? I give it a 65% probability of being the low for the next three months.
But that view could change in the next few weeks with new information or economic catalysts.
Right now, I just think that market players got too paranoid about an invisible growth slowdown and took the market down too far, too fast.
Maybe Thursday's ISM manufacturing survey shows that purchasing managers are growing worried about the economy and thus some paranoia about stock valuations is justified.
In any case, whether or not I see new data that changes my mind, I never get too rigid about my expectations, or too reactionary in my trading decisions.
As Benoit Mandelbrot and Nassim Nicholas Taleb taught us in the last decade -- before the financial crisis -- "wild randomness" rules markets and asset prices.
If you haven't read The Black Swan or The (Mis)Behavior of Markets, consider grabbing one of these for some winter reading.
I will give you my one sentence summary for how the bell curve “normal” distribution fails most financial practitioners in understanding, much less predicting, risk...
"Markets are social beasts full of wild randomness and when anything can happen, there is no standard for deviation."
While you can't always predict a correction or its depth, you can gauge when and where it is a terrific buying opportunity in a bull market. Keep this article handy for the next one.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader portfolio.
3 Medical Stocks to Buy Now
The greatest discovery in this century of biology is now at the flashpoint between theory and realization. Billions of dollars in research have poured into it. Companies are already generating revenue, and cures for a variety of deadly diseases are in the pipeline.
So are big potential profits for early investors. Zacks has released an updated Special Report that explains this breakthrough and names the best 3 stocks to ride it.
See them today for free >>