Here’s an update with some illustrations of the 3-Step Stock Market Correction Playbook.

All three steps have been completed since my last update with Steps 2 and 3 both occurring on May 9th.

Step 1. The S&P 500 closed above the red line, its 21-Day Moving Average. This first happened on April 26th, but at that point, momentum was still weak, and the market fell back down below the red line. On May 3rd the S&P 500 made a second attempt and once again closed the day above the red line, and since that day it’s been off to the races.

Step 2. New all-time highs! Step 2 of the Playbook requires that the market breaks out above its most recent high, which in this case, was the prior all-time high from March 28th. Well, eight days after the S&P 500 got back above its 21-day moving average (the red line from Step 1), it broke through that prior high of 5,264 and closed at 5,308 on May 15th, and most importantly, it did it with some momentum.

Step 3. Momentum exceeds a reading of 60! On May 9th it did just that, hitting a momentum reading of 61. And since that day, all but one trading day has remained above 60 - bullish price action that we like to see.

Congratulations!

We made it through the first correction of the year. Congratulations to those who didn’t panic and sell when things got a little dicey. And an even bigger congratulations to those who leveraged the opportunity to “buy the dip” at lower prices.

When you hear the words “investment risk” and “volatility” regarding stock market investing, the -6% decline we just experienced over the past month and a half is what those words are referring to. It’s what makes stock market investing very challenging at times. You don’t have to do any physical labor, but when you see your account go from $500,000 to $470,000 (or whatever your starting point may be) in less than 3 weeks, it can be unsettling. It’s a mental battle - because money is emotional, and as humans, losses hurt twice as much as gains feel good.

It’s the mental pain we must take, for the long-term financial gain on the other side of these stock market corrections. And having a playbook to follow can keep you calm, cool, and in sync with the market.

Thanks for reading, and have a great holiday weekend!

Brian Bond, CMT