Editor's note: You can't prevent corrections... but you can minimize losses.
According to Marc Chaikin – founder of our corporate affiliate Chaikin Analytics – investors are in for a volatile year.
So in today's Masters Series, originally published in the March 11 issue of the free Chaikin PowerFeed e-letter, Marc details the steps you can take today to shield your portfolio from volatility...
Three Steps to Prepare for a Potential Market Correction
By Marc Chaikin, founder, Chaikin Analytics
The S&P 500 Index is down about 7% from its January all-time high of about 6,979...
On the surface, that looks like "noise" – a routine dip in a still-intact bull market.
But the headline number is hiding a tale of two markets that could not be more divergent...
On one side, the equal-weighted Invesco S&P 500 Equal Weight Fund (RSP) is up around 0.3% year to date. This sideways motion has largely come from the financial, energy, industrial, and health care industries.
Conversely, the "Magnificent Seven" mega-cap stocks are deep in the red from their 52-week highs. On average, they're down about 23% from those peaks.
Keep in mind that the Magnificent Seven collectively represent about one-third of the total weight of the S&P 500.
So if these stocks struggle... there's a good chance the S&P 500 does, too.
As an old saying on Wall Street goes, "If the troops lead, the generals will follow."
The troops are hanging on for now. But they are increasingly doing so without the generals. History tells us this is an unstable arrangement.
And unfortunately, that's far from the only headwind investors need to deal with in 2026...
Folks, 2026 is a midterm-election year. It's "Year 2" of the four-year presidential cycle.
So we can look at history to get an idea of the stock market's annual performance during these years...
Unfortunately, recent history shows that the second year of the election cycle tends to be rough for investors.
In short, the stock market posted an average decline of roughly 2% during the past six "Year 2s" of the cycle. In other words, if you owned the S&P 500 in 2002, 2006, 2010, 2014, 2018, and 2022... you lost an average of about 2% overall those years.
Looking back further, over 17 election cycles going back to the 1950s, the probability of a correction of 10% or greater in a midterm year is 70%. That's 12 out of those 17 cycles.
Even worse, the average intra-year drawdown in midterm election years since the 1950s is 18%.
Of course, evolving geopolitical turmoil in the Middle East adds to this correction risk...
Consider the effect of the conflict with Iran on oil prices. Before the war erupted, West Texas Intermediate ("WTI") – the U.S. benchmark – crude oil prices stood at about $67 per barrel. In overnight trading earlier this month, WTI hit more than $100. As of yesterday morning, prices are around $98. That's huge volatility.
And the spike puts the Federal Reserve in a bind...
Elevated oil prices threaten to reignite headline inflation – just as a disinflationary trend was taking hold. A jump in inflation would make the Fed less likely to cut interest rates.
At the same time, the labor market is showing clear signs of stress. Earlier this month, the U.S. Bureau of Labor Statistics ("BLS") report for February showed a loss of 92,000 jobs.
A weakening jobs market normally calls for interest-rate cuts. But the effect of surging oil prices on the core inflation rate could tie the Fed's hands.
Put simply, historical patterns and the current volatile environment point to big potential for a correction in 2026.
Unfortunately, there's not much we can do to prevent a market correction from happening.
But we can set up our own portfolios to minimize any losses that come our way...
There are a few steps you can take to prepare for potential downside ahead...
First, you can sell down to your individual "sleeping level."
Put simply, this means adjusting your portfolio so that even if the worst does happen, you can still sleep soundly at night.
You could consider raising cash in your portfolio and tightening your stop losses to protect capital.
Never invest more than you're willing to lose, folks.
Of course, the Power Gauge will help you figure out which stocks to trim back on and which to keep...
It's a good idea to maintain stocks with "bullish" or better grades in industries with strong ratings in the Power Gauge. These stocks represent the "best of the best."
In this environment, be careful when adding new positions to your portfolio. Be wary of bottom-fishing – particularly in sectors and subsectors with "bearish" ratings in the Power Gauge.
Also, consider holding off on large commitments until the uncertainties clear up. In uncertain times, don't go looking for bargains... Let the bargains come to you.
But regardless of whether we see a market correction, there's an important point to keep in mind...
Keep a level head. Corrections will happen – even in strong markets.
And historically, non-recessionary corrections of 10% to 20% have recovered in an average of just four months. A correction isn't a catastrophe unless you panic-sell at the bottom... or it turns into a bear market.
As always, let the Power Gauge be your guiding light through both corrections and bull markets.
Good investing,
Marc Chaikin
Editor's note: Over 75-plus years, one market cycle has signaled impending stock losses with incredible accuracy...
Marc says that we're approaching another bear market, and this one could bring the worst losses in years. But he's using a "secret weapon" and one little-known strategy to help you lock in gains while everyone else is panicking. Click here to learn more.
