The current market correction has been unusual because of the steepness of its slope. There are few industry sectors that have escaped unscathed and some of the hardest hit are those that performed best over the past several months. The Nasdaq has fallen about 11% from its April peak. But that pales in comparison to the 30% decline experienced by iShares MSCI - Brazil Index Fund (EWZ). I used this fund as an example a couple of weeks ago. It had a three year gain of more than 300%. This is easily the sharpest decline this fund has seen during that period.

The energy sector has also seen double-digit losses in this correction. As an example, Merrill Lynch Oil Sv HOLDRS (OIH) is down about 15%. Precious metals, another leading sector the past few months, has also taken a hit. StreetTRACKS Gold Trust (GLD) has dropped about 10% since peaking a couple of weeks ago.

The big questions most investors have right now are:

• How much longer will the correction last and how much lower will it go?
• How should we be allocated for the biggest gains once the recovery begins?

These are tough questions and unfortunately, the best we can do is make some educated guesses about what is likely to occur. Last week I used a 200-day moving average to show that this is only the fourth time in the past three years that the Nasdaq has dropped below that mark. The other three instances were all followed by strong rallies. That chart below shows the performance of the Nasdaq (black line) and the Dow (gold line) over the past two years. Notice that this correction is steeper than any other experienced during that time. The next most comparable period was July and August of 2004. A correction of similar duration this time would mean we have another couple of weeks before making a bottom.

The bottom portion of the chart is a Moving Average Convergence Divergence (MACD) of the Nasdaq. Notice that the 2004 period was also the last time that the MACD fell to its current level. But a close look reveals a big gap between the blue line and the brown line on the MACD chart. Those lines must come together and cross over when the market turns positive. The wideness of the gap would seem to indicate that we are at least a couple of weeks from that happening.

A word you’ll hear many analysts and market technicians using right now is “oversold.” That essentially means that the market pendulum has swung too far on the side of the sellers. It is like a stretched rubber band or a coiled spring. Eventually the pent up energy is going to swing in the opposite direction. Traders are measuring this condition and are expecting buyers to soon step in and drive the market upward.

As I wrote last week, as an individual investor I would monitor this current market using a 200-day moving average. I would take long positions (buy) when the Nasdaq crosses back above that 200-day MA. Based on the past few instances, I suspect that will occur sometime in June.

Over the past couple of weeks, the only sectors showing gains are those that traditionally gather assets during major market downturns. Government bonds, health care funds and utilities tend to be viewed as defensive positions. When the market corrects, money moves to these sectors. But while these sectors are collecting money now, they will quickly fall out of favor when an upturn begins. Investors will reallocate to other positions in an attempt to get bigger gains.

If this appeared to be a long-term correction–the start of a new bear market–then we would anticipate significant sector rotation as a result of changes in the business cycle. Because this seems to be a correction within a continuing bull market, the sectors that usually perform best on the upswing tend to be those that were strongest before the correction. In this instance that would include international funds, gold funds, and energy funds. In addition, technology funds usually perform well coming off of market bottoms.

Of course, this is just a best guess forecast, not a prediction. There are unforeseen events that could make all of this moot. For example, the next meeting of the Federal Open Market Committee is June 28-29. Another quarter-percent rate hike is anticipated. But if the FOMC were do something unexpected like raise rates by a half percent or announce that rate hikes are over for now, everything would change dramatically.

I’m looking forward to the long Memorial Day weekend. The start of summer has always been a favorite time of year. I plan to do at least a little fishing and my garden is behind schedule. I hope you have a great holiday spending time with friends and loved ones.