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In retrospect, it appears that the long-anticipated stock market correction actually got underway in a stealthy manner late last summer, and it is now beginning to pick up steam as more stocks join the downdraft. So far this has been a rolling correction: First the homebuilders, then the health care sector, next the transports, and most recently energy and materials have gone into the tank.

Information technology is beginning to take a hit now, but the homebuilders, health care and airlines are recovering some of the ground lost earlier. Energy is beginning to show some bounce as the bargain hunters move in, while materials appear to have more downside. The industrial, consumer discretionary, and banking stocks are starting to look shaky. REITs, telecoms, and utilities have held up fairly well so far, but this correction is not likely be over until they have seen a wave of selling too.

I estimate that the correction is about half over in terms of duration. The market is short-term oversold, and in the near future we are likely to see a rally. If a rally occurs I will take advantage of it to lighten my position in certain utility and bank stocks. I believe any rally that occurs will soon give way to periods of increased selling momentum. When the whole correction is behind us, probably by March, I think that the weekly S&P chart will appear to have drifted sideways with a downward bias for several months.

I have been gradually building up a cash reserve since November. Now I am sharpening my pencil and developing a list of stocks I would like to buy at certain bargain price levels, including several high-beta growth stocks of the type I normally avoid. Instead of waiting for confirmation that the correction is over, I will gradually buy some of these stocks and ETFs, but only when I judge the market to be seriously oversold for the high-beta issues, and of course I will not buy more defensive stocks either, unless they are meeting my criteria for price and technical action. My purchases will be announced here as they occur.

It is well and good to have an action plan, but we must also train ourselves to expect the unexpected: unpredictable random events which cause chaos. Murphy’s Law dictates that one of these unfortunate events is likely to occur at the worst possible time for the stock market.

Source: Rolling Correction May Foreshadow General Correction