Three Steps to Prepare for a Potential Market Correction

Editor's note: The Magnificent Seven have plummeted from their recent highs. And according to Marc Chaikin, founder of our corporate affiliate Chaikin Analytics, that's not the only reason to expect a volatile 2026. In this issue, adapted from the March 11 edition of the free Chaikin PowerFeed e-letter, Marc explains how you can prepare your portfolio to thrive in any environment – even a bear market.

The S&P 500 Index is down about 4% 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 sides of the market that could not be more divergent...

On one hand, the equal-weighted Invesco S&P 500 Equal Weight Fund (RSP) is up around 2% year to date. This gain 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 18% from those peaks.

Keep in mind... the Magnificent Seven collectively represent about one-third of the total weight of the S&P 500 Index. 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 have held up for now. But increasingly, the generals haven't. And history shows how unstable that arrangement can be.

Unfortunately, that's far from the only headwind investors need to deal with in 2026...

A Bumpy 2026 Is Likely

Folks, 2026 is a midterm-election year. It's "Year 2" of the four-year presidential cycle.

And 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% in those years.

Looking further back over 17 election cycles going back to the 1950s, there's a 70% probability of a correction of 10% or greater in a midterm year. 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") crude oil prices stood at about $67 per barrel. In intraday trading early last week, WTI shot up to nearly $120. But as of yesterday, prices are around $95. 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. If inflation jumps again, the Fed wouldn't be as likely to cut interest rates.

At the same time, the labor market is showing clear signs of stress. 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, we can't do much to prevent a market correction from happening.

But we can set up our own portfolios to minimize any losses that come our way...

How to Protect Your Portfolio From Chaos

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 and tightening your stop losses to protect capital.

Remember... You should never invest more than you're willing to lose.

Of course, the Power Gauge can help you figure out which stocks to trim back on and which to keep.

The Power Gauge is a tool we use at Chaikin Analytics for analyzing the market. It gathers investment fundamentals and technicals into a simple rating of "bullish," "neutral," or "bearish."

It's a good idea to maintain stocks with "bullish" or better grades that also belong to 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 unpredictable times, don't go looking for bargains... Let the bargains come to you.

But regardless of whether we see a market correction, you must 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: Marc Chaikin predicted the 2020 and 2022 bear markets just weeks before they started. And now, he says we're just days away from a "Bear Market Window" that could usher in the greatest potential losses in years. That's why, on Wednesday, March 25, Marc will reveal exactly what's coming... and where you should move your money now to potentially lock in double-digit gains in 90 days.