3 ways to deal with this correction

**VirginiaBob** · 03-04-2007, 10:31 AM

Many have lost some serious dough with this recent correction. If you were out of the market already, you lucked out. If you were in the market during the correction, you took your bruises. But everything that happened this past week is finished, so let's look towards the future. There are 3 ways one can deal with this recent stock market correction. You can:

1. Get in the market and wait it out, since it is inevitable that the market will eventually reach a new high anyways, more likely sooner than later. Pros - Will see a gain on your money. Cons - At best you are only matching the returns of the indices over the same period, which is not necessarily a bad thing. I'd recommend this approach for most people.

2. Get out of the market, since the correction might not be over. Pros - possibility of buying at new lows. Cons - when exactly do those new lows happen, or have they already happened, in which you will be caught in a double whammy (already lost 5%, and then missed a few % of the recovery). Large whipsaw risk as well by getting in at the first sign of strength, which could be a huge mistake as shown in my analysis of the 3rd option below. This is probably the riskiest approach, but this is what many on this board are discussing of doing (get back in at a sign of market strength). I'd recommend most people don't use this approach.

3. For approach 3, first let's take a look at the previous 3 most significant corrections that the market has endured.

Take a look at these numbers. The previous 3 most significant corrections did not happen all at once. The happened in 3 phases. These are easier to see graphically, but I'm not that internet savvy to do so in a post.

May-June '06 Correction (total 7.7% loss):
Phase 1 - S&P Dropped from 1325 to 1256, 5.2% drop over 2 weeks
Phase 2 - S&P Went up from 1256 to 1288, 2.5% gain, over a week
Phase 3 - S&P Dropped from 1288 to 1223, 5.0% drop over 2 weeks

March-April '05 Correction (total 7.2% loss):
Phase 1 - S&P Dropped from 1225 to 1171, 4.4% drop over 2 weeks
Phase 2 - S&P Went up from 1171 to 1191, 1.7% gain, over 2 weeks
Phase 3 - S&P Dropped from 1191 to 1137, 4.5% drop over 2 weeks

June-Aug '04 Correction (total 6.8% loss):
Phase 1 - S&P Dropped from 1140 to 1086, 4.7% drop over 3 weeks
Phase 2 - S&P Went up from 1086 to 1106, 1.8% gain, over a week
Phase 3 - S&P Dropped from 1106 to 1063, 3.9% drop over a week

So it looks like we are getting an intial drop, followed by a a correction that recovers 38-48% of the initial drop, then a final drop which is about equal to the first drop.

So currently over the last 2 weeks we have seen a 4.9% drop in the S&P 500. So assuming the same scenario above happens, we are going to recover approximately 2%, and then drop another 5% or so.

That said, we don't really know if we are going to get a phase 1,2,3 scenario like we did the last 3 times. Myself, I am going to stay all in, hope for a Phase 2 scenario, then cut back to 50% in stocks after about 1.5-2% of gains, and sell my well down a Phase 3 scenario until it goes down 5%. If the phase 2 scenario never happens, at the worst case, I'll be doing option 1 (see above) and simply remain all iin, and matching the stock market returns, which is not all that bad. If when I cut back to 50% stocks towards the end of Phase 2, and the market keeps going up, I'll potentially miss some gains and will have to be timely in realizing when we are back in a bull market. If this happens, in my case it works out, because I missed most of Phase 1 as well.

**mailmanusa** · 03-04-2007, 12:08 PM

I had been wondering about the history of corrections and how they panned out over time. I was thinking about doing some research but it looks like you have already done that so thanks. Its interesting how each one spaned a 4 week period. Remembering that the past is not always indicitive of future, the figures add different angles of aproach to the pool of thought. Thanks again.

**The_Technician** · 03-04-2007, 01:31 PM

Originally Posted by mailmanusa

I had been wondering about the history of corrections and how they panned out over time. I was thinking about doing some research but it looks like you have already done that so thanks. Its interesting how each one spaned a 4 week period. Remembering that the past is not always indicitive of future, the figures add different angles of aproach to the pool of thought. Thanks again.

I'm expecting some patchy market moves this week....so watch yourself.....

**VirginiaBob** · 03-04-2007, 01:49 PM

Yep, expecting lots of people stuck in some whipsaws.

**Birchtree** · 03-04-2007, 08:39 PM

The 9 month cycle low is due around March 12 plus or minus 4 weeks. And this can take two structures - the price can either move down into the low (if it hasn't done so already) or rally up out of the low. The new 9 month cycle in addition to the upside pressure of the 4 year cycle could give a very nice move. The second being a net sideways and then suddenly move higher once the nesting is complete. I've known that loosing money can be a real adrenalin rush - but the NYSE breadth MCSUM remains above the
+690 level so this should help in curbing any follow through price moves to the downside from this juncture. The SPX breadth MCSUM now has a reading around +570 and we'll see how it tests the +250 level where it has seen prior support. The NYSE TRIN moving averages are fully washed - so either we're setting up for the most important bottom ever seen in the markets or one heck of a bear market is beginning. Snort.

**rondalw** · 03-04-2007, 09:12 PM

Really nice history evaluation. I guess history would indicate that when we get to above 5% drop is the right time to go for the buy?

**VirginiaBob** · 03-04-2007, 10:48 PM

Originally Posted by rondalw

Really nice history evaluation. I guess history would indicate that when we get to above 5% drop is the right time to go for the buy?

If I always knew what the market was going to do in the future, I'd be very rich. But yes, that's where I'm placing my bets. Like I said, even if I am wrong, either way, I'm still buying at heavily discounted prices (4.9%).

**robo** · 03-05-2007, 03:43 PM

Well said VirginiaBob!

**Fivetears** · 03-05-2007, 05:51 PM

V-Bob... were these the cause of Yen Carry Trading?

Originally Posted by VirginiaBob

May-June '06 Correction (total 7.7% loss):
Phase 1 - S&P Dropped from 1325 to 1256, 5.2% drop over 2 weeks
Phase 2 - S&P Went up from 1256 to 1288, 2.5% gain, over a week
Phase 3 - S&P Dropped from 1288 to 1223, 5.0% drop over 2 weeks

March-April '05 Correction (total 7.2% loss):
Phase 1 - S&P Dropped from 1225 to 1171, 4.4% drop over 2 weeks
Phase 2 - S&P Went up from 1171 to 1191, 1.7% gain, over 2 weeks
Phase 3 - S&P Dropped from 1191 to 1137, 4.5% drop over 2 weeks

June-Aug '04 Correction (total 6.8% loss):
Phase 1 - S&P Dropped from 1140 to 1086, 4.7% drop over 3 weeks
Phase 2 - S&P Went up from 1086 to 1106, 1.8% gain, over a week
Phase 3 - S&P Dropped from 1106 to 1063, 3.9% drop over a week

**nnuut** · 03-05-2007, 06:16 PM

There was one in 1989 that was, I just read an article on it and how it related to what's happening now, but I can't find the web site again. If I find it I will post a link here.
Sorry it was 1998!
http://www.rgemonitor.com/blog/roubini/176117/
Norman

**Birchtree** · 03-05-2007, 07:02 PM

I believe it was a bear raid on the Hong Kong dollar that precipitated the crisis.

**James48843** · 03-06-2007, 03:07 AM

Originally Posted by VirginiaBob

Many have lost some serious dough with this recent correction.

Take a look at these numbers. The previous 3 most significant corrections did not happen all at once. The happened in 3 phases. These are easier to see graphically, but I'm not that internet savvy to do so in a post.

May-June '06 Correction (total 7.7% loss):
Phase 1 - S&P Dropped from 1325 to 1256, 5.2% drop over 2 weeks
Phase 2 - S&P Went up from 1256 to 1288, 2.5% gain, over a week
Phase 3 - S&P Dropped from 1288 to 1223, 5.0% drop over 2 weeks

March-April '05 Correction (total 7.2% loss):
Phase 1 - S&P Dropped from 1225 to 1171, 4.4% drop over 2 weeks
Phase 2 - S&P Went up from 1171 to 1191, 1.7% gain, over 2 weeks
Phase 3 - S&P Dropped from 1191 to 1137, 4.5% drop over 2 weeks

June-Aug '04 Correction (total 6.8% loss):
Phase 1 - S&P Dropped from 1140 to 1086, 4.7% drop over 3 weeks
Phase 2 - S&P Went up from 1086 to 1106, 1.8% gain, over a week
Phase 3 - S&P Dropped from 1106 to 1063, 3.9% drop over a week

So it looks like we are getting an intial drop, followed by a a correction that recovers 38-48% of the initial drop, then a final drop which is about equal to the first drop.

So currently over the last 2 weeks we have seen a 4.9% drop in the S&P 500. So assuming the same scenario above happens, we are going to recover approximately 2%, and then drop another 5% or so.

...If this happens, in my case it works out, because I missed most of Phase 1 as well.

I think you are right on target. I lost a little on day one, but managed to move everything the day it fell. I tried one day on the dead cat, and missed.l But other than that, I've been out and ready to jump back.

I will not try to catch the knife tomorrow- I'll wait until Phase 3 is over.

Thanks for the data points- it helps keep things in perspective.