Although the pullbacks in the DJIA and S&P 500 are fairly mild, there is some very severe corrective action taking place in the Nasdaq 100 (QQQ) and many high-momentum technology and small-cap names.
If you have been riding the trend recently, there is a good chance you have given back of chunk of profits the last couple of days. That is what happens when you are trend-following -- when the turn comes, you will take some hits, but hopefully, you have a good cushion of profits that will soften the blow.
The key when this sort of shift occurs is to make sure you have increased cash levels and are not frozen by inertia. You want to have the utmost flexibility as corrective action occurs so that you can continue to cut underperforming names while looking for new stocks that are finding support and heading back up.
The biggest problem that many traders face is that they are afraid that it is too late to sell. They are convinced that the stocks they sell will immediately turn and go back up. That simply isn't the case most of the time, and even if it does occur, there is nothing to stop you from buying back the stock.
When suffering in a miserable market like this, I push myself to do more selling even if a stock may seem already oversold. I will look at it again with fresh eyes once things settle down.
I've raised my cash levels quite a bit and reduced the number of positions I'm holding. I'm less than 10% off all-time highs but still up substantially for the year so I feel positioned well for another run as things reset. I'm sure that if I had been trying to anticipate a correction during the last couple of months, I would be in far worse shape than I am now.
My plan now is to continue to carefully manage the positions I have left and to dig deeper for some new ideas. We have some major rotation taking place, and that means we need to find the sectors that are working best.
Ironically I often find that my level of optimism increases quite after a couple of ugly days like we are seeing now. This is the sort of action that will create the next pile of great opportunities.