Spot and Survive Market Corrections

06/28/2011 5:25 pm EST

Focus: STOCKS

Chris Gessel

Executive Editor, Investor's Business Daily

Volume indicators, institutional selling, and other signs can predict an impending correction and necessitate a move into more defensive sectors, says Investor’s Business Daily executive editor Chris Gessel.

Chris Gessel joins me. Chris, as executive editor and chief strategy officer for Investor's Business Daily, what's your take on the recent stock market action?

Well, we've been quite bearish for about the last five or six weeks. We saw a lot of institutional selling coming into the market and leading stocks were breaking down. So we saw the market was in a correction about three days from the top.

Correction, or do you think this is the start of a new letdown?

Well, you never know how big a correction is going to turn out to be. We're not in the prediction business; we're in the interpretation business. 

So, when the environment turns negative, we step aside, and sometimes it's only a 10% correction, but sometimes it might turn into a full-fledged bear market.

Which is 20% or more?

Exactly.

What about individual stocks? Are you seeing any outliers in this bear market, or this corrective market?

Really the best thing to do in a situation like this is to be very defensive. Raise cash. If you've got some winners that you think are long-term holds, maybe stick with those. Generally, the best place to be right now is cash.

Any sectors that are moving right now?

The sectors that we see leading our universe are defensive stocks, health care, and utilities. All three are sectors that you typically see lead bear markets. So again, we're focusing on growth stocks and we want to be on the sidelines in a situation like this.

Do you take the overall economic picture into account?

Absolutely, we follow the news closely and we know what's going on with the economy.

What it comes down to is the price and volume action in the major indexes, especially the Nasdaq and the S&P 500, and then on top of that, we look at the leading stocks— names like Apple (AAPL) and Baidu (BIDU), Chipotle (CMG)—and see how they're reacting to the market conditions. 

What we're seeing is a lot of those leaders that have been really outperforming since the market bottom in March 2009 are showing some weakness and getting a little tired.

So the advice that you're giving to investors and traders would be to be very defensive and very cautious.

Absolutely. I think right now, the best course of action is to be building a watch list and be ready for the market to turn, because it can turn within a number of days.

Again, that's why we're not really in the prediction business. What we want to know is what is the market doing right now?

You can come up with theories and scenarios of what you think the market should do, but if you get in an argument with the market, that's the surest way to lose money. So we're never arguing with the market, we're following the market.

They always say the market is always right.

Absolutely.

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