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After the market corrected sharply the last week of February, many investors feared the U.S. was on the verge of beginning a new major bear market. At the time I believed (and still do) that the downturn was just a normal corrective pause and that the market’s three-year upward trend was still intact. In fact, on March 8 I indicated that investors with money on the sidelines should be buying back into the market on down days.

In the four weeks since then, the U.S. market has climbed steadily upward. There have been plenty of bumps along the way, but many of the technical indicators that turned negative have swung back to the positive side. We saw another down session Wednesday after the Federal Reserve minutes revealed that a cut in interest rates is unlikely in the near future. While that might not be the most welcome news, it does mean that Federal Reserve officials believe the economy remains strong. Today stocks rebounded and gained back those losses.

The chart below shows the Nasdaq (black line). Since bottoming in March, this index has gained about 5%. Two or three good days would push it back to recent highs and I suspect that will occur sometime in April. The gold line is a simple 50-day moving average. While the index is currently hovering right at that level, the bias appears to be upward.

The middle portion of the chart is a moving average convergence divergence (MACD). It turned positive again at the beginning of the month. The bottom portion of the chart is a relative strength index (RSI). Market conditions are favorable when the RSI is trending above the 50 level. Once again, the Nasdaq moved back into that territory last week.

This latest correction is fairly typical of the past two or three years. Downturns tend to be sharp and most of the damage occurs in just a few days. In those situations it is generally better to ride out the correction than to try to bail out. In many cases, exiting those positions merely creates a new dilemma: When do I get back in?

For example, if an investor used the 50-day moving average to sell his long position during this latest correction, he would have lost about 3% and prevented an additional loss of about 4%. But that same investor would have missed the 5% gain that has occurred since the bottom and would just now be contemplating jumping back into the position.

While timing can sometimes be an effective tool to guard against catastrophic market risk, it is generally ineffective and often detrimental in short and intermediate-term corrections.

In this case, it certainly appears that holding our positions through this correction was the right thing to do.
F.S.