Nice little 200 point drop in the Dow yesterday, however it looks like it is being contained. The depth of a correction tells us something about the underlying strength in the market. So far this correction has been a one day event. I would expect that we will continue down and test the most recent support point at 2400 on the S & P 500.

One hedge to a market decline is called the Market Volatility Index (VIX). This index has very rarely traded below $10 in the last 8 years. There have been some good upside moves in 2010 and 2012 when the market declined over a number of weeks. But over the last 4-5 years we have seen 1 or 2 day advances in the VIX, and subsequent retreats back to the $10 area.

If you had been invested in the VIX last Tuesday on the 3rd of August. You would have made 50-60% on your investment in a couple of days and the risk doesn’t seem to have been that great. I would be waiting for a top to be formed like I mentioned in this post (click here).

Remember, as the market reaches new highs, not all stocks will participate. The markets are being dominated by a fewer number of stocks and it is imperative that you have a plan to identify which of your stocks need to be sold before the market actually does top.

If you look at the S&P 500, you’ll find that 40 percent were in correction territory (A stock or an asset class enters a correction when it falls at least 10 percent from its 52-week high). I believe that it is a warning sign when a fewer number of stocks carry the markets to new highs.

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