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How To Trade During A Stock Market Correction

Wayne Duggan

The S&P 500 started off the fourth quarter on shaky ground, pulling back about 8 percent from its September highs. On Thursday’s Benzinga PreMarket Prep show, co-host Dennis Dick discussed how traders should approach market corrections and what action he’s been watching lately.

Red Flag

The market bounced back a bit Thursday morning, but Dick said lagging bank stocks are a potential red flag that the market rebound could be temporary.

“Some of the banks are not responding well at all, and this is not good news,” Dick said. A drop in the iShares Barclays 20+ Yr Treas.Bond (NASDAQ: TLT) should be good news for banks, he said.

The TLT ETF is down 2.3 percent so far in October, but the Financial Select Sector SPDR Fund (NYSE: XLF) is also down 7.2 percent in that time.

Dick said that at this point in the correction, traders can expect plenty of unpredictable near-term volatility.

“It’s impossible to predict,” he said. “It’s a coin flip.”

Staying Market-Neutral

In this type of environment, Dick said he’s taking market-neutral positions.

“I’m completely market-neutral right now [and] just trading little inefficiencies. A stock pops just a little too much, I’m willing to sell. A stock drops a little too much, I’m willing to buy,” he said. 

Even catalysts like earnings reports and analyst ratings aren’t necessarily tradable in times like these, Dick said. 

“If you see a real convicted upgrade or downgrade, that can still move the stocks, but not like on a day where nothing’s going on. People are too busy to even worry about ratings." 

Profiting From Inefficiencies

While the market volatility may seem scary from a distance, Dick said periods like this are his most profitable times.

“Typically on these types of days I have my best trading days,” he said. “That’s just the way it goes because I’m doing different types of arbitrage strategies, and the inefficiencies become a lot more pronounced when you have volatility.”

Don't Panic

Allstarcharts.com's J.C. Parets said the most important thing about trading a market correction is simply not to panic.

"Recognizing that stock prices falling is a regular occurrence that needs no explanation in order to profit from it, is a huge advantage," Parets wrote on Thursday.

"We want to focus on how we’re going to profit. That might seem like common sense, but you’d be surprised at how many people invite more noise into their office or home when in fact, it’s the time to be tuning the noise out even more."

Parets also referenced a history of bull and bears markets, courtesy of this chart from First Trust Portfolios:

firsttrustchart.png

Listen to the podcast of Thursday's show below.

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET here. The replay can be found on Benzinga's YouTube channel, and the podcast is on iTunes, Google Play, Soundcloud, Stitcher and Tunein.

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