Social Media ETF, SOCL, is already back hitting new highs — potentially a good sign for the overall market.

Has the recent nasty selloff in the stock market run its course, or was it the beginning of a more substantial, longer-term decline? That is the question on many market observers’ minds at the moment. While we do not and cannot know the answer to that question with certainty (nor does anyone else, for that matter), there are clues that get dropped during correction/recovery episodes that may be particularly helpful in addressing the question — if one knows what to look for. And one such clue may hold good news for stock market bulls.

During serious, longer-term corrections, we typically see correlations in the stock market head toward 1.00. That is because normally nothing is spared during such market routs. However, if the selloff is less serious, on a longer-term scale, there will likely be pockets of the stock market that hold up reasonably well, or at least recover in particularly swift fashion. Today’s Chart Of The Day points out a possible example of that latter scenario.

One of the relative strength leaders of the bull market in recent years has been the internet stocks, including the social media faction of the sector. This strength has been exemplified by the performance of the Global X Social Media ETF, symbol SOCL. SOCL is up about 150% since its low in 2016 and 70% since the beginning of 2017. The fund was not immune to selling pressure during the recent market rout. However, as the chart show, it has rebounded especially well, closing back at an all-time high yesterday.

The first takeaway is that, according to our philosophy of buying or concentrating our holdings in relative strength, i.e., the better performers in the market, SOCL should still be considered one area of relative strength. Therefore, it should still be considered for investment. It is particularly so, in our experience, given that the fund has recovered its entire decline already. The first areas to recover following a decline are often leaders in the subsequent market period. Therefore, SOCL should continue to be a leader, especially if a new market up-leg commences.

Secondly, in our experience, when considering the significance of declines, if something is working, then it is more likely that the whole thing, i.e., the market, is not broke. In other words, if investors are still showing considerable demand for stocks of any kind, then perhaps a bear market is not imminent.

In this case, the fact that SOCL is back at new highs may be a sign that the recent stock market decline was not the beginning of the end for the bull market.

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.