Cycles are the one constant in the stock market. Ups and downs will occur, with bull markets followed by bear markets. Many market participants believe that if they invest in solid companies and wait long enough, everything will work out in the end. There is no need to be concerned because good stocks always return. If you understand, accept, and embrace the reality of market cycles, the flow of good chances might be overwhelming. First and foremost, it is critical to recognize that the majority of significant market corrections are connected, as we witnessed in 2008-9 or in early 2020 when the COVID pandemic struck. These corrections have very little to do with a stock’s specific characteristics. Everything is for sale, regardless of what it might be. When someone sells the S&P 500 or Russell 2000 ETFs, they are also selling every stock in those indices. When a correction hits, thousands of ETFs trade enormous buckets of equities, and the good is thrown out with the bad. This is when market corrections present themselves as a huge opportunity. Stocks are sold all at once, with no effort made to differentiate the good names from the bad. Charts can assist, but to realize which stocks have the most chance for substantial upside once a market correction ends, you really need to understand the individual condition of each business and the fundamentals. The first stage in the process is to determine your goals. Every day on RealMoney.com, I talk about stocks that aren’t well covered but that I believe have something special that will eventually propel them upward. The first thing we do is look for those names, then watch them closely and learn more about them. After we’ve identified some viable targets, it’s all about time and positioning. I usually start with a tiny position merely to keep the stock on my radar. That forces me to keep a close eye on it and learn how it trades. My strategy is to make a lot of buys and sells when the market volatility rises, but many of the major winners occur when I establish larger holdings during market downturn. Traders’ biggest difficulty during market corrections is that they already own too many of their preferred equities that are underperforming. They don’t want to buy more and end up with an uncomfortably huge position, and they also don’t want to sell because their confidence is high. It presents a perplexing situation. I usually deal with this by putting some tight stops on names I like, but with the intention of repurchasing the stock if conditions change. It makes no difference whether I repurchase at a greater or lower price. When I feel the technical conditions are better and I have a stronger level of conviction, I want to repurchase. One of the most significant advantages of lowering your position size in a stock you like is that it alters your thinking and emotions. Rather than bemoaning the lack of action, you embrace it and see it as a possible opportunity. There’s always the possibility that you made a wrong decision, but by reducing your position size, you can reduce your risk until the stock proves itself again. There are a few equities that I like right now that have been underperforming. I’ve cut them down a little, but my plan is to repurchase them in a larger quantity if market conditions improve and suitable catalysts appear. I’m keeping a close eye on them, and it honestly makes me happy when they keep breaking support and causing a slew of complaints. The market’s cyclical structure rewards those who take opposing views during market extremes. It’s critical to reduce risk when the market corrects, but it’s equally critical to focus on position for the next favorable cycle./n
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