4 Steps I'm Taking to Prepare for a Deeper Correction

The market is struggling again on Wednesday morning as investors nervously await the Nvidia NVDA report after the close. The Magnificent Seven names are lagging, breadth is negative and there are few pockets of strength.

The big question is whether Nvidia earnings will kickstart the market and add some energy to the recent uptrend or if it will be a "sell the news" event that marks the end of the AI euphoria.

While Nvidia is very likely to have a strong beat-and-raise quarter, it may not be enough to maintain AI as the market-leading group. Combine that possibility with negative seasonality and the fear that the Fed rate cuts may trigger selling, and the danger of deeper corrective action is enhanced.

I generally avoid making market predictions and instead focus on the current price action. Currently, I see too many extended charts and few good entry points, and that is all I need to be more cautious.

I recently wrote about how keeping your accounts as close to highs as possible is the key to producing exceptional returns. Making up substantial drawdowns is the most unproductive thing you can do in the market, and you want to avoid that as much as possible.

Here are the steps I’m taking to keep accounts as close to highs as possible and to prepare for a deeper correction:

Raise cash levels.

When market conditions are poor, cash levels will automatically increase as you take stops, lock in gains and are selective with new buy entries. The most important thing is to not be in a big hurry to redeploy that precious capital. Stay patient and wait for the charts to improve.
Tighten up stops.

Think of selling as being a form of insurance. You can always rebuy a stock that you sold, and if you have to pay a higher price, then think of it as an insurance premium that you paid to keep you safe.
Have your shopping list ready.

I’ve reduced some names that I like very much longer term and have some other names that I want to add to substantially in front of catalysts that may be weeks or months in the future. I watch these names very closely and may even day trade them as opportunities arise, but the goal is to go big at the right time and not just endlessly average down my cost basis.
Keep a positive mental attitude.

Many market players become depressed when the market goes through a corrective cycle, but that is what will create the next batch of great opportunities. Bad markets are inevitable, but you make big money when you catch the cycle and turn to the upside.

I may be very wrong about deeper corrective action, but if I am, I’ll be quick to admit and will work hard at putting cash to work. The great thing about the market is that there is always a new opportunity.

At the time of publication, DePorre had no positions in any securities mentioned.