How to Manage a Market Correction

When determining how to manage a market correction, one of the first things you need to consider is how each of your holdings has performed over the correction period. In order to arrive at this assessment, we examine relative strength.

Relative strength measures the performance of a security versus an appropriate index over a given time frame. When we see a security that is performing worse than the given benchmark or index, we say that it is underperforming. When we see a security that is performing better than the given index, we say that it is outperforming.

While relative strength is often very useful for trading purposes, its utility diminishes during a stock market collapse. Often during a collapse, most securities that have outperformance eventually lose their performance edge. It was for this reason that I advised readers to look first to sell their winners in the market forecasting section.