Correction Territory: Putting It Into Perspective

After the type of sell-off the market endured on Monday and early Tuesday, it can be challenging to put emotions aside and keep perspective. Days like those can make it seem as if the market is collapsing, but in reality the S&P 500 is now essentially trading exactly where it was in mid-December.

By The Numbers

From January’s high point of 2,872.87 to Tuesday’s low of 2,593.07, the S&P 500 dropped 9.7 percent. At this point, the sell-off doesn’t even meet the qualification of a garden-variety correction, which is typically defined as a pullback of at least 10 percent. Generally, a market correction is considered a healthy part of a longer-term bull market and is only half way to the 20-percent decline that marks a transition to a bull market.

The Expert Take

A number of market experts have weighed in on the importance of keeping this week’s trading action in perspective.

The market became overheated in January, and the 50-day moving average tends to be like a magnet for the market in the longer term, said Adam Sarhan, founder and CEO of 50 Park Investments.   

“Everybody is calling for this to be the top of the market ... but history shows us that stepping up and buying after sharp sell-offs, especially when there's no major catalyst behind it, has been a very strong move going forward," Sarhan said Tuesday morning on Benzinga's PreMarket Prep

Nic Chahine, author of "Create Income With Option Spreads," said he’s mostly on the sidelines until the market settles. “I'm not shorting, I'm not employing new shorts. What I do is I hunker down, I manage my risk and I see if I can nibble on things here and there,” Chahine said. 

Wall Street Journal columnist Jason Zweig said this week’s trading action was more a test of investor psyche than a test of the bull market itself. “If a 6-percent daily drop makes you squirm, then you probably have too much invested in stocks for your own psychological good,” he said. 

Lane Mendelsohn, vice president of  the artificial intelligence research platform Market Technologies, said things could get worse before they get better.

"We're telling [clients] that VantagePoint is forecasting it will keep going down, so they should probably take some money off the table," Mendelsohn told Benzinga. "But it's also an opportunity. Taking money off the table gives you an opportunity to play the downside."

Making Lemonade

Dennis Dick, co-host of PreMarket Prep, said traders should always have the flexibility to roll with the punches and make the most out of whatever hand the market deals on a particular day. Dick said that traders using the right strategies made a lot of money on Monday.

“I had the best day in probably three years,” Dick said. He typically uses a statistical arbitrage trading strategy that involves pair trading. Days of extreme volatility often create short-term divergence among highly correlated stocks, Dick said. For example, he said buying The Coca-Cola Co KO down 2 percent and shorting Procter & Gamble Co PG down 1 percent is a relatively safe pairing.

“These are your best days as relationship traders, because they're throwing everything everywhere,” Dick said.

The Dow closed Tuesday at 24,912, up 567 points or 2.3 percent. The S&P 500 closed up 46 points, or 1.7 percent at 2,695.

Related Links:

What To Make Of The Market Sell-Off: Yields, Value Plays, And Volatility

'Busiest Trading Day Ever': Brokerages, Retail Clients React To Volatility

Posted In: 50 Park InvestmentsAdam SarhanJason ZweigLane MendelsohnMarket TechnologiesNic ChahineAnalyst ColorPsychologyTop StoriesExclusivesMarketsAnalyst RatingsTrading IdeasInterviewGeneral