Market Milestones: Correction

One week ago, QQQ was sitting right on its bull market support trendline, while SPY was holding onto its 200-day SMA. It looked like the market was setting up for a bounce. Last Friday’s price action even gave us a promising hammer candle with a lower wick and some volume. But come Monday morning, trade war fears ramped up, and any bullish hopes of a bounce were immediately crushed, leaving dip buyers—who were used to instant gains—feeling instant pain.

Since then, the SPY has fallen another 4%, bringing its total decline to just over 10%, and just like that we are officially in a correction. Every member of the Magnificent 7 has now entered bear market territory, each down 20% or more from their all-time highs.

SPY

This sell-off feels unprecedented, but in reality, we just saw something almost identical in August 2024. Back then, QQQ dropped 16% in 17 trading days—right now, QQQ is down just under 14% in 17 days. The patterns are extremely similar. Most of the Mag 7 are also tracing nearly identical corrections to what they saw in August. However, this time might be different.

Unlike in August, QQQ has closed below its bull market trendline and 200-day SMA—something it never did in that prior correction, or since the bull market began. And what makes this sell-off feel even more painful is the fact that the S&P 500 has not closed above its prior day’s high in over three weeks! This relentless selling has made hedging and protecting on bullish bounces impossible, since they never materialize.

QQQ

Why is this correction hitting harder? First, investor exposure was at an extreme. Retail traders entered 2025 with record-high exposure, conditioned by two years of non-stop gains. Risk management went out the window, and every dip was seen as a buying opportunity—until now. Second, the reasons for this sell-off are different from what we saw in August. Back then, the Japan carry trade was responsible for at least half of the downside move. While unsettling, traders understood that it wasn’t an existential risk to their portfolios, so they bought the dip, pushed past their fear, and the market rebounded. This time, however, the risks feel bigger. An escalating trade war, inflation that remains 50% above the Fed’s 2% target, the government’s urgent need to refinance $7 trillion in debt, and rising recession fears are all creating an environment of extreme uncertainty. With so much hinging on trade negotiations—something that can escalate or de-escalate overnight—traders and investors are left scrambling. The CNN Fear & Greed Index has plunged to Extreme Fear (15), its lowest level in years, while RSI is hitting oversold levels not seen since the start of the 2022 bear market.

What Can Traders and Investors Do Now?

First, evaluate your timeframe and capital preservation plan

• If you’re a long-term investor in broad market indices, this should be viewed as a buying opportunity. Dollar-cost averaging into the market at lower and lower prices can lead to higher returns over time.

• If you’re a short-term trader, your risk mitigation plans should have already kicked in. If they haven’t, now is the time to implement a system and a plan to protect your capital. Stops and small position sizing have been my two primary risk-management tools during this downturn, with a several collars implemented near the top of the market. With puts being so expensive due to the VIX being in the mid-20s, I’d rather stop out of a position and buy back in higher than get crushed on overpriced puts at the bottom.

Second, evaluate your holdings

• Take a hard look at what you’re holding. Many high-flying names have collapsed 40-60% in less than a month—HIMS, RDDT, APP, and PLTR, to name a few. Some of these may have good fundamentals, but a lot were purely momentum plays. If you’re bag-holding stocks you knew little about and didn’t use stops, you’re not alone, we have all been there at some point. Use this as a learning experience to always manage risk and have a game plan before jumping into crowded trades.

• If you’re wondering what to invest in now, it’s best to stick with proven winners that will be around in the long run. The Magnificent 7 fit this bill, and they all happen to be at the center of this decade’s most important trend: A.I. As you may know, NVDA, MSFT, and Bitcoin remain my top long term plays, but if you have a long enough time horizon, and utilize a bit of technical analysis you can’t go wrong with any of the Mag 7.

Bitcoin (BTCUSD)

Where’s the bottom? There are a few key signals to watch for:

1. A large capitulation gap down followed by a reversal (like we saw in January 2022, February 2022, October 2022 and August 2024)

2. A large bullish reversal candle without a gap

3. A significant gap up with strong follow-through

However, bear in mind that we may not get the classic V-bottom we saw multiple times in 2023 and 2024. There’s a real possibility that the next bounce gets sold off again, making a new lower high and then lower low. That’s why taking partial profits, using stop-losses, and being nimble is critical.

The Bottom Line for Your Top Line

In times of extreme uncertainty like this, cash is a valuable position, and risk management is critical. While the market just saw a similar correction in August 2024, this one feels more intense due to excessive retail exposure, deeper macro concerns, and a relentless sell-off with no relief. The Magnificent 7 have all entered bear markets, and while history suggests opportunities will arise, and may in fact be getting closer than many might think, caution and aggressive risk management are essential right now.

Long-term investors should focus on strong companies and dollar-cost averaging, using these corrections as opportunities to add to their positions. Traders must prioritize risk mitigation with stops, hedging, smaller positions, and selective stock picking. The key now is to watch for clear bottoming signals before getting aggressive to the bull side, and even then, risk must be managed carefully now that key levels have been broken. Whether this plays out as a V-bottom or a prolonged downturn, staying nimble and protecting capital will be the difference between outsized gains when the market turns or simply hoping to get back to break-even.