Back In The Saddle

The market is slightly weak in early trading, although there has not been a whole lot in the way of market moving news.

The big news this morning was that massive earthquake in Japan, which caused numerous tsunami warnings. This led to selling in Asian markets, which closed across the board with losses. Europe was also lower this morning.

Energy stocks are bouncing back, despite oil falling below $100 this morning (currently $100.50). The focus of today was supposed to be the "Day of Rage" in Saudi Arabia, but so far it has fallen out of the headlines.

The dollar is lower this morning, which is helping gold prices stay firm at $1413. The 10-year yield is flattish around 3.40%; and the VIX is down nearly 5% to 21.0 after yesterday's big spike higher.

Trading comment: Last week I said that despite the market mulling around that it was still early in this correction in terms of time, as opposed to price. Most bull market corrections fall in the 3-6 week range, and this most recent one is in its third week. So that means we probably still need to be patient in letting things run their course. This week, negative sentiment picked up in the options indicators, which is a good sign from a contrarian perspective.

In terms of price, the S&P 500 has pulled back only -3.8% so far from its recent highs. That is not a big pullback. A normal correction is often in the 5-10% range. So we should also not freak out if the market pulls back further in the near future. A 5% correction would take the SPX down near 1275, which looks like it could be the next area of support anyway. But SPX 1250 could also be a possibility. And a pullback to those levels would do nothing to derail the current bull market.

I don't know exactly how it will play out, which is why we monitor the price/volume action daily. If we got a big, high volume rally, with some follow through action, that would mark an early end to the correction. But a more likely scenario, is that we will get some light volume rallies that look like they are signaling an end to the correction, but they will be followed by more selling after the bounce.

For investors, the keys to corrections are to raise extra cash in the portfolio, adhere to stop-losses on all your new buys, and take partial profits on issues where you have gains. But keep the focus on the big picture, and don't let any one day derail your investment plans.

Good luck.