How to Dominate a Summer Stock Correction

Could stocks fall 5% this month?

Absolutely.

In fact, the market could chop lower the rest of the summer. Despite what we’ve experienced since the November election, I assure you 5% and 10% corrections are still part of the game.

Here’s the rub…

Anyone who tells you stocks can go straight up forever is either a liar or a complete doofus. Stocks offer the possibility of big returns — which is why we can’t expect smooth sailing to higher prices. Instead, the stock market demands unpredictable swings, shakeouts, and false moves.

The bumpy ride serves and important purpose: to make you uncomfortable. Every so often, the market gods must shake out the weak hands. It’s amazing how quickly a confident investor is reduced to tears when a stock that has gone straight up over the past six month takes a big hit…

The headlines on the finance page aren’t doing you any favors, either. Reporters are grabbing the bear by the paws during the slow summer months, frantically shouting nonsense about every popular stock that’s been hit by strong selling.

July market headlines are ripping apart the high-profile tech stocks. Tesla stock is correcting? Elon Musk’s credibility must be taking a huge hit! NVIDIA shares are 10% off their highs? Investors are finally starting to worry about its absurd valuation!

As we slog through the next several weeks of market action, you need to avoid the circus of speculation surrounding politics, the Fed or other media-assigned “reasons” for a pullback. Anyone trying to trade the news will get badly burned as the market feels its way through the summer. Don’t get sucked into the storyline.

A little perspective is in order if you want to survive (and book consistent profits) during a possible summer slide.

Let’s turn back the clock to 2013. The market was hot right out of the gate following the fiscal cliff “crisis” that emerged right before the new year. When all was said and done, the major averages posted incredible gains. The S&P 500 rose 30% in 2013. The Nasdaq Composite jumped more than 38%.

In hindsight, 2013 was an uninterrupted profit-fest for traders and investors. Ask any market participant to recall 2013, and they’ll probably tell you that stocks shot higher all year.

Except that’s not true…

After rushing to gains north of 16% during the first five months of the year, the major averages stalled out. The S&P endured a 7% peak-to-trough pullback that ended in late June, followed by two more 5% pullbacks before finally ripping higher in October.

During a historic year for stocks, the major averages doled out nearly five months of difficult chop and essentially went nowhere. But no one remembers these difficult moments. The fourth quarter sprint to new all-time highs erased the herd’s memory…

The market’s notable lack of volatility during the first half of 2017 has lulled many investors to sleep. The little jolts we’re now experiencing are slapping unprepared traders in the face. They’re another painful reminder that stocks can’t rocket higher every single day without encountering some pullbacks and corrections along the way.

The Nasdaq Composite – our first-half market leader – has remained stuck below its 50-day moving average so far this month. That’s its longest streak below its 50-day so far this year. It’s entirely possible that tech stocks remain in the sellers’ crosshairs.

As we’ve explained over the past several weeks, now’s not the time to recklessly swing for the fences. If you’re trading, a few stop losses might have already triggered. You’ve already used six months of incredible, low-volatility trading conditions to book gains. Don’t ruin your year by making too many moves during choppy summer trading sessions…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning