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  • The Value of Market Corrections (重发)

    The Value of Market Corrections (重发)
    Market Overview


    The Chinese market went straight down in the past 1 to 2 weeks, which wiped out many late comers' paper profit, principles, and their confidence. Anticipating such a correction is exactly why we recommended selling a part of your winning position into the strength since a month ago.

    Now what? Well, had you sold some stocks and locked in a nice profit already, as we did, you sit and watch the market patiently and do nothing. Had you gotten in late and hadn't sold any, you are now in pain. Now it is time to study. Now you realize that making money in the market is not as easy as it seems so easy, for a while. It takes experience, understanding the market and yourself, and discipline to be able to profit consistently from the market. In a long bull market like we had since July 2014 to May 2015, making money seems to be easy, for a while. But as you have found out, nothing could be further from the truth. Remember, in the market, the majority will eventually lose. The major know nothing about the market (although they think they do), and know even less about themselves (although again, they think they do).

    We feel that this market correction is about over. However, with such a big damage to the market's uptrend, its ascend will not resume without some serious work. We feel that this correction will now start to go back and forth, for months. We expect a bounce of some kind as soon as the next week, but we feel that this will be just noise, we still hold our winning positions, and just sit and watch. Or better yet, forget about the market for a while, study the market and ourselves, or just have some fun in life. Right now, it is not the best time to trade the market, expect volatility (both up and down). We expect that for months, the Chinese market will go nowhere. And our best posture in such a choppy market is to do nothing! It is sometimes more important to know when to do nothing - now it is such a time!

    Look at the positive side: during a major market correction like the one that we are experiencing now, it is the best time to find out which stocks will likely to be the big winners in the next index up leg.


    The Value of Market Corrections


    We love market corrections/consolidations. First, trading takes time and energy. During market corrections, the best approach is to wait, thus, we can take a break while the market is taking a break. Second and more importantly, during market correction, we can relatively easily identify which stocks are likely to surface as big winners when the marke correction is over. Indeed, 80% to 90% of successful patterns in individual stocks are created during general index correction.

    Chart patterns, or “bases,” are simply areas of price correction and consolidation after an earlier price advance. Most of them (80% to 90%) are created and formed as a result of corrections in the general market. The skill you need to learn in order to analyze these bases is how to diagnose whether the price and volume movements are normal or abnormal. Do they signal strength or weakness?

    Approximately 80% to 90% of price patterns are created during periods of market corrections, you should never get discouraged and give up on the stock market’s potential during intermediate-term sell-offs or short or prolonged bear markets. The stocks that form recongizable patterns will be the new leaders. Do not allow yourself to get discouraged and stop looking for winners just because the market is in a correction.

    Corrections, or price declines, in the general market can help you recognize new leaders—if you know what to look for. The more desirable growth stocks normally correct 1½ to 2½ times the general market averages. In other words, if the overall market comes down 10%, the better growth stocks will correct 15% to 25%. However, in a correction during a bull, or upward-trending, market, the growth stocks that decline the least (percentagewise) are usually your best selections. Those that drop the most are normally the weakest.

    Say the general market average suffers an intermediate-term correction of 10%, and three of your successful growth stocks come off 15%, 25%, and 35%. The two that are off only 15% or 25% are likely to be your best investments after they recover. A stock that slides 35% to 40% in a general market decline of 10% could be flashing a warning signal. In most cases, you should heed it.

    Once a general market decline is definitely over, the first stocks that
    bounce back to new price highs are almost always your authentic leaders. These chart breakouts continue week by week for about 13 weeks. The best ones usually come out in the first three or four weeks. This is the ideal period to buy stocks . . . you absolutely don’t want to miss it.

    The figure below shows how CBG, a real estate stock traded on the NYSE, copes with the general market correction (in the Spring of 2005). Subsequently, as the index turns around and goes up about 20%, CBG also turns around and goes up more than 100%. This is one of the ways we identify the best stocks, get in at the optimal point, and ride them to the end. Yes, we love market corrections.
    The Value of Market Corrections (重发)




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