The Most Profitable Way to Play a Summer Correction

There’s no denying it– yesterday’s price action was ugly.

After a rather bullish start to the week, stocks tumbled. The fall was led by small-caps, which continue to lag the market in a major way. That’s not exactly bullish heading into the summer.

The crash-callers will be out in full force this week. That’s fine. Let them have their fun. But back in reality, I don’t think it’s time to run and hide from stocks just yet. In fact, if you take an objective view of the market, you’ll see that a summer correction might be just what the doctor ordered…

Here’s what you need to know…

The S&P is quickly approaching a record run. My fellow technician Charlie Bilello from Pension Partners has kept track of the winning streak. All told, the S&P 500 has gone 372 trading days without a cross below the 200-day moving average. The record over the past 50 years, Charlie says, is 385 days– which occurred in 1995-96.

S&P 500, July 2013-April 2014

As you can see, a quick 6% drop would bring the S&P 500 back to its longer-term moving average. But if we look back to the last time the S&P wound down below its 200-day moving average after a huge run, the pullback was a little bigger…

1996 saw an 11% correction from May high to July low to end the 200-day streak, Charlie reminds us. And from my vantage point, an 11% correction beginning sometime this summer would be very healthy for this market. Also, it’s important to keep in mind that the 11% pullback in 1996 resolved with a huge year-end rally.

Regards,

Greg Guenthner
for The Daily Reckoning

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