This week the Nasdaq entered what’s called a correction.

This simply means that the index closed more than 10% from a recent high.

I’ll be the first to admit that there’s nothing magical about a round number like this. But it does help position us in the current market cycle.

It also brings to mind important questions like what happens next and whether this could lead to another bear market before stocks manage to change direction. 

Before we can answer these questions, it’s worth looking under the hood to see what caused the correction in the first place.

Below you can watch a clip from my Live Income Call that I host for my Income Alliance members where I discuss some of the major factors driving the stock market selloff.

Video Transcript:

We'll go ahead and jump right in and take a look at what's going on in the market. As you guys know, we've got more of a challenging tone right now. The overall market is really breaking some key support levels. The Nasdaq is now today in what they call correction territory, which simply means that the Nasdaq composite has pulled back 10% from its all-time high. Typically, we look at 20% as a bear market and 10% as a correction. There's nothing magical about those numbers, but it does help sometimes just to categorize where we are in this whole market cycle and to understand and also to look back and be able to look at statistics for when we enter a bear market, what is likely to happen, when we enter a correction, how often do we come out of it without a bear market, and so forth. Those things can be helpful just for studying market trends, but I want to be careful not to place too much emphasis on any one label, because just like people, markets are all very different and we don't want to lean too heavily on any one specific label.

This morning we received a GDP announcement, which just basically tells us how the economy did for the third quarter, and GDP came in above expectations. So, the US economy grew at an annual rate of 4.9% in the third quarter, which was more than people expected. A big part of that was fueled by consumer spending. Now, it's important to notice that consumer spending in all of the GDP data is backwards looking. So we're looking at the third quarter, which ended September 30, today is October 26. A lot has happened in the three and a half weeks since we ended the third quarter.

It's one of those things where it's important for us to know what's going on, but we don't want to place too much emphasis on this GDP report because we know that specifically the hostilities in Israel and then also some of the economic numbers that have come through have shown a little bit more weakness than what we saw in the third quarter. So we still have some major concerns. Inflation obviously is something that we're still keeping a close eye on, and inflation does appear to still be stubbornly high. We've come off the high levels of inflation, but we still have more inflation than we're supposed to have right now, and that's a real big strain on families like yours and mine and on the overall economy.

We've got student loan repayments that are coming back into force now, and that could take a lot of this consumer spending off the table as families have to start paying $300, $500, $1,000 a month for these student loans. That takes money out of spending for other areas. And then we've got rising housing costs, rising energy, all that's part of that whole inflation story, and so it's important to keep track of what's going on. That's a big part of why the market is selling off.

We are also in the middle of earning season, and specifically investors have been looking very carefully at some of the large-cap tech stocks and have been reacting to these announcements even just this week. Yesterday, Google traded sharply lower, I hated seeing that. It's one of our positions as you guys know, and this one has been a disappointment. Google actually beat earnings and revenue estimates. Basically on the earnings call, they talked about their cloud business being softer than expected, and this is an area where investors were excited about Google's growth. I do still think that Google's parent, Alphabet, they're going to be okay. They're building their profits. It's a solid business, and they're part of this whole AI excitement, and investors are enthusiastic about artificial intelligence.

However, Google may have gotten ahead of itself a bit. And this pullback, I'm watching it carefully to see if we can find support or not. If we can't find support, then we may be able to adjust our positions and really profit from a rebound. If Google continues to be weak and if the overall market continues to be weak, then we may need to just cut bait and run with that one. But that ties back to something we'll talk about here in just a second, just to balance and making sure that we have both bullish and bearish positions in a choppy market like this so that we can profit regardless of which way the market's moving.

Today, we've got Meta trading lower, and that's another one of the fantastic seven. Basically they beat or they came in with profits that were very strong, but they're forecasting a slowdown in their advertising revenue as we become more worried about a potential recession. Another thing that was highlighted this morning on a new service that I was watching is that a lot of times advertisers don't like to spend as much during wartime. It's kind of seen as maybe unsavory to be running significant ad campaigns when we know that people are hurting in Israel and as war starts to pick up. So that's something that we'll need to keep an eye on, whether that affects Meta long-term.

Even Microsoft, they announced positive earnings and the stock gapped higher, but it's now selling off as investors are moving away from this whole tech area. So that's important to keep in mind. A lot of times we wind up with a situation where investors, they want to be all in or all out of certain categories, and right now we're seeing just a flight of capital away from mega-cap tech stocks. Now, every mega-cap tech stock is not equal. Some are doing better, some are doing worse. But unfortunately, the way the market works and the way mutual fund managers work and the way sometimes even individual investors work is they just say, "All right, I want to wash my hands of this particular area of the market," and they sell, and it drives all of the stocks in the same area lower. And that's really what we're seeing right now.

Now, our portfolio is relatively balanced, and I'm comfortable with where we are. We've got a decent amount of cash right now just because we've been able to lock in some profits recently. I will say I hate losing money on some of our bullish plays, so I'm not trying to candy-coat this or sugarcoat it or make it sound better than it is. When we have a play like Google that trades sharply lower, I hate that, it's frustrating. But at the same time, I'm grateful that we have the flexibility to be able to capitalize on stocks that are trading lower. We saw just this morning, we were able to sell our ALGN position. We had a bearish position on the line, the stock dropped after earnings, and we were able to lock in a 188% gain on that position. So that's just proof of our balanced approach and why that makes sense for us as investors, because we are able to make profits on stocks that pull back, and that can help offset some of our losses. Even on our bullish plays that we expect to do well, sometimes they won't. And so if we're balanced in that way and we set up our positions right, we can actually make more on plays that work in our favor than we lose on the plays that move against us.