One strategy I use during market corrections is Relative Strength. Specifically, I look for stocks showing “strength” and holding up well “relative” to the market. The theory behind this is that if the big institutions do not sell certain stocks during corrections, these stocks have a high probability of moving higher when the correction is over.
For example, during the financial crisis of 2008-09, two stocks that barely went down were Green Mountain Coffee and Netflix. After the market bottomed in 2009, both stocks went on to gain over +1000%. Again, the theory is that strong stocks that survive corrections are just waiting to explode higher once the heavy selling pressure ends.
This week, I bought light positions for clients in some of the strongest stocks I could find. If the market has bottomed and these stocks begin to show us a profit, then more stocks should set up and we will get more invested. If these stocks fail, we only lose a little (because they are small positions) and we wait patiently for better conditions.
This strategy isn’t for everyone, but it has worked well for me over the years. Again, the key is not to get the EXACT bottom in the market. The key is to take advantage of the majority of an uptrend when the market is healthy. Remember, this is a marathon for me, not a sprint. My goal is to produce consistent positive returns over a long period of time. Missing part of a rally is no big deal because I also missed a majority of the downside so far this year by having a large cash position. If this rally is for real, there will be plenty of time to make money when the market continues to prove itself.
If you are in the NYC area next week and would like to learn more about Relative Strength, I will be giving a FREE talk at the NYC Traders Expo on Tuesday, February 23rd at 4:30PM EST. I will also be at the MarketSmith booth on Monday, February 22nd at 4:30PM EST going over my stock screens and discussing the strong fundamental stocks that are holding up well in this market. Thank you!
I can be reached at: firstname.lastname@example.org