4 Ways to Deal with the Market Pullback

High correlation is back. Today 96% of the S & P 500 stocks lost ground. Usually such high correlation correction assumes more immediate weakness ahead, so be careful blindly buying dips.

I am still under the assumption that this is a pullback within the realms of an existing uptrend and eventually it will turn out to be a buying opportunity. Below I list 4 ways to deal with the pullback. Which ones you are going to apply depends on your time frame of operation and risk affinity:

1) Watch for strength to give you a hint on potential future leaders. Stocks rising in a weak tape are usually under heavy accumulation for a long-term reason. Some examples from today: $PAY $SHFL

2) Pay attention to sector rotation and look to nibble stocks with high long-term relative strength, but short-term relative weakness – or in other words, stocks that have corrected over the past 2 weeks or so and are finally finding some buying interest. For example: semiconductors ($NANO $KLAC) and precious metals ($SLW $NGD) – for a mean-reversion, short-term trade.

3) I assume that you already have a wish list of stocks that you want to own on a pullback and did not want to chase. Market corrections are long-term investors’ best friends as they offer great brands on sale. My wish list includes: $COP $CMG $NKE $DDD.

4) Stay heavy in cash and wait for new long setups to show up and market averages to resume their upward trend, before you allocate more money on the long side. Good setups are like taxis. There is always another one just around the corner.