The Autumn Correction Is in Full Swing - Here's How to Profit

It only feels as though the media have said everything there is to say about the market over the last three weeks of this downturn.

The talking heads are still missing something - something they're just not keen enough to grasp about all of this. But, to be fair, the big news is hard to ignore.

After all, the late week phase of the pullback took all the major indexes back to, or just below, their break-even levels as far as year-to-date returns are concerned.

That's something that should scare the hell out of investors. However, I'm still seeing signs that there is a little too much bullish enthusiasm for stocks to call that "the bottom."

Even accounting for Thursday's bounce, sell-offs have shaved just about 10% from the S&P 500's October high. In doing this, the benchmark index crashed right through its 50- and 200-day moving averages. It's still sitting below those lines as of Friday midday.

So it's "official" in my book, for what it's worth: The market is embroiled in an intermediate-term bearish pattern.

Now let me show you what to do about it...

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This Looks a Little Different Than the February Correction

In February, during the last big correction, we ultimately saw a decline of 12% or so. But the 200-day moving average stepped up to save the day, offering beefy technical support for a rally that took us right on through the end of summer.

Things may have changed this time around.

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Another indicator that Friday wasn't the bottom is the CBOE Volatility Index - the VIX. We talk about this "fear index" often, and that's because it's incredibly important.

Yesterday's high for the VIX was 27.40. To add some context, the VIX hit a high of 50.30 during the February pullback. And again, the S&P 500 was able to stay above key support during that correction.

So, we've got a market that is already in correction territory with some big differences:

  • The S&P 500's 50-day moving average is now declining, a bearish indication.
  • The VIX, especially in light of its February "pre-rally" reading of 50.3, is telling us that investors are still complacent.
  • The market lacks any sign of leadership from key sectors (financials, tech, small cap).
  • "Safety sectors," like utilities and consumer staples, are seeing a migration of cash as yields continue to climb.
  • Correlations of the indexes and sectors continue to decline; that suggests that the broad market rally is finito.

That's the way it is. There are a couple of things we can do with this information.

Here's the Big Takeaway for This Coming Week...

So we've got some less-than-bullish and outright bearish conditions prevailing in the market right now.

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You might consider all this and conclude: "Aha, time to go to cash now!"

That's not quite the case, though it never hurts to have a little dry powder on hand. Rather, we're shifting once more into a classic "stock picker's market."

What does that mean? Well, for one, it means index funds, if you ever owned them, should be decisively binned.

More importantly, it means that now, more than ever, being in the "right stocks" is going to provide huge payouts as traders are going to become more nimble in their never-ending search for returns.

(I'll show you a little bit about where you could potentially find these stocks in a second.)

... And Here's What to Do About It

This puts stock pickers in a sweet spot as we approach the November through January period that clearly begins to favor the bulls. As I've always said, volatility favors traders like you and me as it creates opportunities.

In my paid services, for instance, we've been more selective during the volatility spike, but the profits have been king-sized. We took advantage of one such opportunity this week when we closed our recently opened iShares Russell 2000 Index ETF (NYSE Arca: IWM) puts for a big 80%-plus profit.

And as this market progresses, we're going to see more trade opportunities as earnings season hits its stride over the next few weeks.

If you're not along for the ride with my research recommendations, click here to learn a little more. I just gave my subscribers a shot at 14 consecutive winning closeouts - in a very rough market. Otherwise, be in quality stocks, like the ones that have the highest Money Morning VQScores™ here; VQScore picks are always free.

In other words, be in full-on stock-picker mode now for the coming season.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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