How To Profit From The “Stealth” Market Correction [Dow Jones Industrial Average(INDEXDJX:.DJI)]

bearbull21Mike Burnick: A “stealth” market correction has been underway on Wall Street the past few months. If you blinked, you might have missed it.

Choppy market conditions since the beginning of March made some investors jittery about stock market valuations. But beneath the surface we’ve witnessed a rotational correction; many of the stocks and sectors thathad been market leaders in 2013 needed to cool off and correct, while others rose to the top.

Small-cap stocks in general and especially biotech and Internet shares got clobbered last month. Meanwhile, the major indexes including the S&P 500 and Dow Industrials continue to sail on to all-time highs.

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You can witness this performance divergence for yourself in the graph above. After outperforming the S&P by a very wide margin last year, Nasdaq-listed Internet stocks were overdue for a pullback and have indeed reverted sharply to the mean.

Like a rubber band stretched too far, the biggest winners were destined to snap back to earth at some point.

During March and April, the S&P 500 Index chopped up and down in volatile fashion without gaining much ground; up 1.2 percent to be exact. An investor returning on the first day of May after two months away from the markets could easily conclude not much had changed.

But if you were invested in biotech, Internet or small-cap shares over these two months, you were in for a shock.

The Dow Jones Internet Index ETF (NYSEARCA:FDN) dropped over 18 percent from peak to trough during the same period, and the SPDR S&P Biotech ETF (NYSEARCA:XBI) plunged 32.7 percent.

This type of market rotation can certainly be unsettling for investors to experience first-hand, but it’s only natural at this stage of the game, after a five-year bull market. The good news is: new leaders rotated to the top, preventing a significant correction for the overall stock market.

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