Since the bottom in 2009, downside momentum has been a rare phenomenon. There have been a few periods of correction in the indices -- such as January 2016 and August 2015 -- but most of the corrective action that has occurred in the last nine years has occurred on a rotational basis and hasn't infected the indices to a great degree.
We are now experiencing some of the worst corrective action since the bottom in 2009. There is some real downside momentum -- and it is not just rotational. What is most notable is that the FAANG names -- Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet/Google (GOOG) , (GOOGL) -- which have long been a safe haven for growth investors, are leading to the downside. These stocks have bounced back so quickly, for so long, that it was a reflex among investors to keep buying them.
The market has now come to the realization that these stocks are not without risk. Facebook has collapsed since its earnings report in July, as management struggles with privacy issues. Apple is down again this morning, as it becomes clear that iPhone sales have reached a mature phase and can no longer grow like they once did.
The weakness in these names is spilling over to the other big-caps. Ironically, the ETFs -- such as the Nasdaq 100 ETF (QQQ) -- that helped these stocks to move higher in tandem is now causing them to all move lower in tandem.
The most important thing to keep in mind about this market right now is that ETFs and much of the program trading do not distinguish between individual stocks. Picking "good" stocks versus those that have problems will not protect you in this environment.
Many investors like to believe that the best way to navigate a market undergoing a correction like this one is to focus on picking stocks that are the best values. That is a good idea when the market is bouncing back, but not when there is a highly correlated selloff and correction taking place.
Navigating the market effectively is all about timing, but far too many market players are insufficiently patient. They understand that good stocks will bounce back when the market rallies again, but they are too fast to buy them. Rather than wait for positive price action to occur, these investors buy into the teeth of a decline and hope that they will nail the exact low.
Betting that you will catch the exact low is a very poor strategy. The far better approach is to wait until there are some signs of positive action and then buy with tight stops. As long as you manage trades tightly and don't let losses grow, you can handle the risk of buying broken charts.
An ugly open Tuesday morning is probably the best thing this market can do. From a technical standpoint, this open will create a retest of the October lows for the Nasdaq 100 ETF -- and will put the Nasdaq close as well.
The Dow Jones Industrial Average, S&P 500 and Russell 2000 (IWM) still have room to fall to retest their October lows, but many individual stocks are very washed out. The weakness we are seeing now is primarily technology driven, but other groups are going to be able to bounce as sentiment will remain negative.
This is not a market for stock picking. This is a market for making shopping lists and then staying patient. Do not be in a rush to buy until there is better price action.