The recent correction may be painful for ETF investors, but the pullback is not something out of the ordinary and is part of a small setback in a healthy stock market environment.
Goldman Sachs and CNBC analysts point out that the average correction for the S&P 500 since World War II lasted four months and saw equities slip 13% before bottoming, CNBC reports.
In contrast, the average bear market in the S&P 500 extended to 13.2 months and plunged 30%.
On Friday, the broad market index officially slipped into a correction and was 10.5% below the all-time intraday high on September 21, 2018. The benchmark also dipped into negative territory late-Monday after starting off on a positive note.
Meanwhile, the Dow Jones Industrial Average is over 8% off its own record high and fell more than 500 points Friday at its lows.
“It’s a bad sign that oversold markets not bouncing,” Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist, said. “The inability of oversold markets to bounce suggests investors worried by either systemic financial market event or recession.”
A correction is defined as a market down more than 10% from the high. Bear markets are defined as a 20% fall in stocks from their high.
The technology sector has been particularly hit during the pullback after tech giants released quarterly earnings results that topped analyst estimates but fell short of revenue targets.
“Asset carnage is cross-market and has infected U.S. tech leadership,” Hartnett said, adding that the asset class is oversold.
The strategist has warned of potential bearish signals, highlighting rising interest rates, slower economic growth and excessive debt as negative indicators.
To help keep one’s cool in any market condition, ETF investors should have a methodical strategy in place. For instance, at ETF Trends, we try to stick to three rules that should help keep most investors out of trouble: First, investors should maintain an 8% stop-loss on ETF positions. Second, people should keep an eye on the trend – if the ETF starts to test its 200-day average, then it is time to consider action on the trade. Lastly, don’t chase after hot areas of the market.
The first and perhaps most important screening process for ETFs is knowing the 200-day moving average of each candidate and where it stands in relation to it. We look for uptrends, and then examine those trends using fundamental analysis. Once a position is entered, we stay in the investment until the trend turns sour or declines below its trend line.
For more information on the trend following strategy, visit our trend following category.