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It is safe to say that all eyes are on Cyprus this morning as the proposed tax on savings accounts (10% on accounts over 100K euros and 6.75% on accounts below 100K) has brought the European debt crisis back into focus. As usual, the key here is the situation with the banks. First, the banks in Cyprus. Second, the banks in Greece and then the eurozone. And finally, the banks around the globe. Who has lent what to whom? Which banks have exposure to big losses? And won't a tax on bank deposits just mean that savers will take their money and run? And then if other countries decide to adopt this type of tax in order to get help from the eurozone, aren't bank runs a serious possibility? In short, this is what today will be all about.

But since the banks are closed in Cyprus today (and may stay closed for a while) and the bottom line is the proposal to basically grab money from the citizens of Cyprus still needs to be approved by the country's Parliament, the severity of the current problem remains unknown. (Note that new proposals such as Russia coming to the rescue in exchange for oil/natural gas exploration rights are coming fast and furious and the government in Cyprus is already backing off of the "levy" proposal to some degree.) So, while we will once again be focused on the headlines, comments, and rumors out of Europe, I think it is okay to return our attention to the bigger picture of the markets this morning.

Back To The Big Picture: How To Play the Coming Correction

Although the DJIA finished lower on Friday for the first time in eleven sessions (and was red for only the second time in the last 14 days), there was some good news. First, while everybody on the planet knows that this rally is a bit extended and vulnerable, the bears didn't really get much of anything going on Friday (and it remains to be seen how much damage the Cyprus situation will actually cause). And second, as I detailed on Thursday, a 10-day winning streak on the Dow is (a) rare (17 prior occurrences since 1900) and (b) a relatively good harbinger for the bulls.

To review briefly, if the DJIA winds up with a gain over the next two weeks, history shows that the returns for 10-day periods after a 10-day winning streak are more than six times the average return for all 10-day periods. And if the DJIA can finish higher over the next month, the average return is five times higher than normal. Then the returns for the next eight weeks (assuming the Dow is up for the period) have averaged +5.71%, or more than 5.4 times the average 8-week return. In short, THIS is what market momentum is all about. In other words, when the bulls get on a roll like this, they tend to stay on a roll.

But (c'mon, you knew that was coming, right?) ... Everybody on the planet is nervous right now - especially now that Cyprus appears to be blowing up. The macro bears (including more than a few big hedge fund names) are more than a little concerned about those short positions that have been costing them big money this year. And then the bulls are nervous because everybody knows how this type of joyride to the upside tends to end.

If memory serves, the type of relentless rally that we're seeing now, where it is next to impossible to "get in," usually ends with a "whoosh" to the downside. In other words, these short-term momentum surges tend to either end with, or be interrupted by, a big, bad, downturn, which often leads to a momentum run in the other direction. As such, anybody long the market right now is probably getting a little anxious. And the key question this morning is if Cyprus will be the trigger for this type of move.

So, now that the Dow's 10-day winning streak is over and the S&P 500 is within a stone's throw from a new high, it is probably time to take one of two tacks. (1) Investors can decide that they've got history on their side and bet that any corrective action that appears in the near-term will be short and shallow. Or (2) you can be proactive and decide to prepare for the coming bear raid.

For those choosing option one, there really isn't much to do here. Probably the biggest thing is to be prepared to watch the action closely during the upcoming correction. You will need to be on the lookout for signs that your thesis is wrong. We'd suggest watching key support levels such as 1480 on the S&P 500. A breach of this level would mean that the correction would be exceeding the 5% level (from Friday's closing price, that is), which would be a very simplistic method of confirming that the decline may be turning into something more than a garden-variety pullback within an ongoing bull move.

For those choosing option two, you will probably want to start taking proactive action - and soon. The reason for taking action sooner rather than later is simple: The next decline will likely involve a negative catalyst or trigger. As such, once the catalyst occurs, EVERYONE looking for such a trigger will jump on the short side at the same time. Thus, the time available to react to the move is likely to be very limited.

Five Proactive Methods for the Upcoming Correction

1. Reduce Your Beta

The first way to play for the correction that nearly everybody in the game is looking for is to reduce the beta in your holdings. In English, this means that it is probably time to take your foot off the gas pedal a bit.

According to Wikipedia, "beta" is defined as follows: In finance, the Beta of a portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500.

If a portfolio strategy that you employ tends to outperform - especially during rising markets - then it is a safe bet that said strategy has a fairly high beta. The idea here is to reduce the beta of the strategy by raising some cash with the goal being to bring the beta down to 1 or below.

Here's an example. In our "Insider Buying Strategy" we buy stocks that corporate insiders (employees that are required to notify the government when they buy their company's stock) are buying - but only when they are buying heavily. (In short, this tells us that something is "up" with the company.) We take a concentrated approach in this portfolio, meaning that each holding is a 10% position. Such an approach has performed quite well and has outperformed the market handily. However, we have also learned over time that such a concentrated approach will be much more volatile than the market - especially during corrections.

So, given this knowledge and the fact that the market is very overbought, we have been raising cash recently. Currently we have more than 30% on the sidelines. This is due in part to the market environment and the fact that there have been very few stocks that meet our buy criteria of late. The goal here is to "take the turbo" off of the portfolio for a while in an attempt to retain the healthy lead we've got on the S&P index this year.

2. Put On a Hedge or Two

The second way to play is to put some hedges on in your portfolio. For the uninitiated, the idea is to buy stuff that goes up when the market goes down. Yes, this approach will indeed hurt your performance if the market roars higher from here. Thus, you need to understand that putting on a hedge is like buying homeowners insurance - it has a cost and only pays when something bad happens.

The question of how to hedge (i.e. what to buy) is tricky. A popular approach is to be "long premium" via the volatility index (aka the VIX). However, note that the ETFs designed to mimic the VIX do not do so consistently for a myriad of reasons. Thus, be very careful buying ETFs such as the VXX or the VXZ as they may not deliver what you are expecting.

You can also buy ETFs designed to hedge such as the AdvisorShares Ranger Equity Bear ETF (HDGE) or the ETRACS Fisher-Gartman Risk Off ETF (OFF). But it is important to note that the HDGE is an actively managed ETF. Thus, their "bets" may not pay off as anticipated. In addition, before you bomb into the OFF, which is promoted by media darling Dennis Gartman, understand that this ETF is VERY thinly traded at times and that the "risk-on/risk-off" trade that was popular during 2010-2011 has become far less so these days.

But perhaps the most straightforward way to hedge a long-oriented portfolio strategy is to use inverse ETFs and/or leveraged inverse ETFs. Although there are many alternatives to choose from, my personal favorites are the ProShares Short S&P 500 (SH), the ProShares UltraShort S&P (SDS), which is a leveraged ETF designed to deliver 2X the daily return of the index, and the ProShares UtraPro Short S&P (SPXU), which is a 3X leveraged short ETF.

However, given that the stated objective of these ETFs is to deliver the inverse (or some multiple thereof) on a DAILY basis, these may not be good long-term holdings. Studies show that shorting the long ETFs (SPY, SSO, and UPRO) is a more sound approach for those comfortable with putting on actual short positions.

The strategy here is to either use cash in your portfolio to buy inverse ETF's in order to hedge the remaining long positions (which, we assume, you would want to hold onto during a garden-variety market pullback) or to sell short positions. Such an approach will produce profits in the portfolio during market declines, which should offset some or all of the losses on the remaining long positions.

3. Sell Premium

The next idea is for those folks with stock portfolios. Assuming your portfolio is of sufficient size - meaning that you hold positions of 100 shares or more - you can "sell premium" on positions you want to continue to hold in order to produce some income for your portfolio. In short, the idea is to sell calls on positions you want to hold (i.e. sell a "covered call"). This approach is best when the pullback is expected to be shallow. And it is also important to note that selling covered calls may cause your long position to be "called away" if the bulls continue to run. However, this is a relatively low-risk way to help your stock portfolio weather an upcoming storm.

4. Play The Rotation Game

You can also reduce the beta in your portfolio by swapping out more volatile positions with some lower beta holdings. The idea here is to take profits on stocks that have been rocket ships lately [things like Home Depot (NYSE:HD) or Google (NASDAQ:GOOG)] and replace them with lower beta areas such as utilities or telecoms. However, it is VERY important to note that in declines - especially if they become severe - ALL stocks go down, it's just a question of degree. Thus, this approach probably provides the least amount of "defense" for your portfolio of the alternatives reviewed so far.

5. Hire a Pro (My Personal Favorite!)

Finally, you can hire a pro that specializes in long/short and/or active management strategies. This one is dear to my heart, so I'm definitely talking my book here. But another way to play for an upcoming correction is to hire a manager (or purchase a subscription service) that is adept at sidestepping declines and/or profiting from big corrections in the stock market, and then allocate a portion of your portfolio to this type of strategy.

This is where my marketing team tells me that I should insert a shameless plug for our services. But, I'm not big on marketing and besides, I think you get the idea. But know that we're here to help if you are looking for some ...

Let's talk strategy ... Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision System Can Help.

Turning to this morning ... Foreign markets and U.S. futures are down hard in response to Cyprus's decision to impose a one-time tax on bank savings. If approved (the measure needs to be voted on in Parliament first) this would appear to be a game-changer in the eurozone debt crisis. Should other countries decide to implement similar taxes on bank deposits, capital would likely flee the banking system. This would further weaken the banks and reignite the concerns over the global banking system. As such, this is an issue that we must focus on going forward.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell ...

Major Foreign Markets:

Major Foreign Markets:

- Shanghai: -1.69%

- Hong Kong: -2.00%

- Japan: -2.71%

- France: -1.38%

- Germany: -1.03%

- Italy: -1.98%

- Spain: -2.03%

- London: -0.81%

Crude Oil Futures: -$0.90 to $92.55

Gold: +$9.90 to $1602.50

Dollar: higher against the yen and pound (currently trading under 1.30 to 1.295), lower vs euro

10-Year Bond Yield: Currently trading at 1.94%

Stock Futures Ahead of Open in U.S. (relative to fair value):

- S&P 500: -13.85

- Dow Jones Industrial Average: -87

- NASDAQ Composite: -26.41

Thought For The Day ... Always and never are two words you should always remember never to use. - Wendell Johnson

Positions in stocks mentioned: none

Source: Daily State Of The Markets: Will Cyprus Be The Trigger? (And Ways To Play The Coming Correction)