The market correction that started in early September is continuing as we wrap up the worst-performing month in a year.
The process is progressing, but the bottoming process is exceedingly difficult to time. What is particularly difficult right now is that there is still a very wide gulf between big-cap stocks and much of the rest of the market. Nearly half of the stocks in the Nasdaq composite are down more than 20% from highs, and around 60% of all stocks are trading under their 200-day simple moving average of price. Yet, despite the poor action in so many stocks, we still keep hearing about bubbles. The only thing in a bubble is some of the indexes.
On top of this great disparity between various areas of the market, we have a chaotic debate taking place in Washington over a huge amount of spending, new taxes, and the debt ceiling. It is a mess, and as we all know, the market hates uncertainty.
The good news is that the third quarter is ending, and we are heading for what should be a strong earnings season and the positive seasonality that normally occurs to end the year. The corrective process right now is actually an ideal setup for a strong run in the next couple of months.
I'm looking for a rebound in some stocks Thursday afternoon as some last-minute window-dressing takes place, but my primary strategy is to start building up positions next week when we begin to see better relative strength in some of the smaller stocks that I favor. I am quite optimistic about how conditions are developing.
It is probably a good thing that the pundits are so focused on big-caps and really don't see how well the secondary stocks are developing. If you are looking at Microsoft (MSFT) , Facebook (FB) , and Micron Technology (MU) , then you are missing the charts that are setting up the best right now.
We have plenty of bearish sentiment now as well, and that is something else that should help to drive stocks once we move deeper into the fourth quarter.
This market currently looks quite poor, but that is exactly what we need to set up a great environment for stock picking.