Market Corrections Aren’t Time To Sit Still; That’s The Time To Build Watchlists

A market correction of some sort almost always occurs during presidential election years. That’s not always great for politicians, but for investors, corrections — including the one the size of the coronavirus stock market crash — always mean opportunity on the rebound.


Sometimes rebounds take time. Other times, a recovery can be surprisingly quick to arrive. In 1990, the S&P 500 pulled back 20% in three short months. It then turned with a follow-through day and launched into eight straight monthly advances. That ascent then grafted onto what would became the dot-com rally, driving a decadelong bull market.

So the key is to be ready early. That means having a watchlist of top stocks near buy points and in valid base patterns. You want to have this ready to go when the market confirms a new uptrend.

Many long-term leaders tend to break out at or near the follow-through, the market bottoming signal. Missing that early opportunity can be a costly mistake.

Gear up for the next week’s market action by reading IBD’s Investing Action Plan.

A Stock Market Watchlist

One way to get a running start is to go to the “Stock Lists” pulldown menu at the homepage. There you will find at least 16 lists, created by automated screens programmed to search for varied, specific traits. Some of the top screens include IBD 50, Big Cap 20, Sector Leaders, Stock Spotlight and IPO Leaders.

Find stocks that fit your own investment profile. Aggressive investors tend to go for more-volatile stocks. More conservative players often lean toward stocks with track records of more steady, but maybe slower growth.

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Once you decide on names from the IBD lists, do your own due diligence. To familiarize yourself with the company, read a company 10-K regulatory filing and the most recent 10-Q. Do an online search, both through your brokerage account and on the internet, to make sure you know all the recent news of the company.

Keep an eye out for acquisitions, management changes, debt or stock offerings, layoffs, dividend changes, product launches, geographic expansions or contractions. Much of this will be listed in the regulatory documents. You want to become an expert on your company, know its competitors, and spot what to keep an eye out for — good and bad.

To be sure, you do not have to use the stock screens. Many savvy investors build their stock market watchlist based on their own leads, intuition or understanding of technologies, industries and so on.

But even for those with expertise in specific areas or fields, the screens can save a great deal of time. They weed out weak earnings and revenue growth, thinly traded stocks and those lacking in institutional support. These are things investors sometimes overlook until late in the process, then suddenly find they’ve wasted hours in unneeded research.

Pruning A Stock Market Watchlist

One challenge to forming a stock market watchlist during a correction is that, as you wait for a follow-through day, stock charts may change. That means some bases among your watchlist stocks may deteriorate. Other stocks might advance past buy points, staging untouchable ghost breakouts during the correction.

So updating is important. One strategy is to keep a list of stocks that are at or very close to real breakouts. Another list might have attractive stocks that are further below buy points or in consolidations that haven’t matured into valid bases.

As one of the front-rank watchlist stocks either falls apart or passes its buy point, a second-tier stock is often ready to move up and take its place. Then find a new candidate to plug into the empty slot. This works well once the market kicks back into a confirmed uptrend.

As front-row stocks break out to new highs and begin their rallies, move second-tier stocks forward on your watchlist.

And maybe the most important point: Don’t wait to start. Market corrections can in rare instances last for months, even years. But normally, follow-throughs and rebounds occur more quickly. And they have a habit of sneaking up, then exploding when you least expect it.

The last place you want to be at that point is sitting on cash with no clear options, and finding yourself uncertain as to which stocks to grab.

This article was originally published March 20, 2020. Find Alan R. Elliott on Twitter @IBD_Aelliott


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