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Last week, I wrote an in-depth piece about why I believe the major US indices are likely to chop back-and-forth for the first half of 2024. To summarize, the reasons that I believe the market is in for a frustrating period include election year seasonality trends, over-heated sentiment readings, and the need for digestion after a robust end-of-2023 rally. While there are no guarantees my prediction will come to fruition, the data points laid out in the article suggest the odds favor a range-bound market. Regardless of whether or not a consolidation occurs or not in the first half of 2024, investors would be best served to prepare for such a market as it will inevitably happen at some point in the future.
Handling A Choppy Market Properly
“You adapt, evolve, compete, or die.” ~ Legendary billionaire investor Paul Tudor Jones
Below are five ways to adapt to a choppy, volatile market:
When the market speeds up, you should slow down…
Fast markets often suck amateur traders into overtrading. Overtrading may lead to poor investment decisions, as emotional reactions tend to cloud judgement and cause investors to deviate from their long-term goals. Remember, the “machines” and high frequency traders take over in choppy, fast markets. I have found that the best way to beat high-frequency traders is to become a low-frequency trader.
Position Size Smaller, Widen Risk
Price expansion is the proverbial “pebble in the shoe” for inexperienced investors. As volatility rears its ugly head, investors make knee-jerk decisions that rarely turnout well. Though it may sound counterintuitive, widening risk can help investors to sit in positions. By widening risk, I mean on a percentage basis, not a dollar-amount perspective. For example, imagine that I usually risk 5% on a position. If the market becomes volatile, I can instead cut my position size in half and risk 10% on trades (In this example, my risk is double on a percentage basis but remains the same from a dollar-at-risk perspective). The wider risk and lower position size can help investors keep their emotions in check to weather the storm.
Check for Market Breadth
One dangerous and often overlooked aspect of Wall Street is deteriorating market breadth “beneath the surface.” What I mean by beneath the surface is that the general market indices such as the Nasdaq 100 ETF ((QQQ - Free Report) ), the Russell 2000 Index ETF ((IWM - Free Report) ), or the S&P 500 Index ETF ((SPY - Free Report) ), can be trending higher even though participation is anemic. A fantastic breadth barometer to pay attention to is the net new highs versus new lows list. If there are more net new highs than lows, the market is typically healthier, and vice versa. Like a check engine light in a car, market breadth can tell you if something is wrong, even if it is not apparent to the naked eye.
Image Source: Stockcharts.com
Wait for the Price to Breakout and Provide Clear Direction
Few things are more frustrating than owning a stock stuck in a consolidation phase. How does one know when a stock is stuck in the mud? Pay attention to the moving average – if the 50-day moving average flattens, your stock may be digesting gains. If you find yourself getting frustrated with a consolidating position, wait for a decisive breakout (ideally on heavy volume). For example, four months of frustrating price action could have been avoided by investors in market leader Nvidia ((NVDA - Free Report) ) if they simply waited for a decisive breakout to occur.
Image Source: TradingView
Traffic in Low Beta Stocks
Low beta stocks are those that historically exhibit lower volatility compared to the overall market. Low beta stocks like IBM ((IBM - Free Report) ) can be a refuge of stability in choppy markets characterized by price fluctuations and uncertainty. Investors can find the beta of a stock on the Zacks.com quote page.
Image Source: Zacks Investment Research
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Choppy Market? 5 Ways to Weather the Storm
Choppy Market Ahead?
Last week, I wrote an in-depth piece about why I believe the major US indices are likely to chop back-and-forth for the first half of 2024. To summarize, the reasons that I believe the market is in for a frustrating period include election year seasonality trends, over-heated sentiment readings, and the need for digestion after a robust end-of-2023 rally. While there are no guarantees my prediction will come to fruition, the data points laid out in the article suggest the odds favor a range-bound market. Regardless of whether or not a consolidation occurs or not in the first half of 2024, investors would be best served to prepare for such a market as it will inevitably happen at some point in the future.
Handling A Choppy Market Properly
“You adapt, evolve, compete, or die.” ~ Legendary billionaire investor Paul Tudor Jones
Below are five ways to adapt to a choppy, volatile market:
When the market speeds up, you should slow down…
Fast markets often suck amateur traders into overtrading. Overtrading may lead to poor investment decisions, as emotional reactions tend to cloud judgement and cause investors to deviate from their long-term goals. Remember, the “machines” and high frequency traders take over in choppy, fast markets. I have found that the best way to beat high-frequency traders is to become a low-frequency trader.
Position Size Smaller, Widen Risk
Price expansion is the proverbial “pebble in the shoe” for inexperienced investors. As volatility rears its ugly head, investors make knee-jerk decisions that rarely turnout well. Though it may sound counterintuitive, widening risk can help investors to sit in positions. By widening risk, I mean on a percentage basis, not a dollar-amount perspective. For example, imagine that I usually risk 5% on a position. If the market becomes volatile, I can instead cut my position size in half and risk 10% on trades (In this example, my risk is double on a percentage basis but remains the same from a dollar-at-risk perspective). The wider risk and lower position size can help investors keep their emotions in check to weather the storm.
Check for Market Breadth
One dangerous and often overlooked aspect of Wall Street is deteriorating market breadth “beneath the surface.” What I mean by beneath the surface is that the general market indices such as the Nasdaq 100 ETF ((QQQ - Free Report) ), the Russell 2000 Index ETF ((IWM - Free Report) ), or the S&P 500 Index ETF ((SPY - Free Report) ), can be trending higher even though participation is anemic. A fantastic breadth barometer to pay attention to is the net new highs versus new lows list. If there are more net new highs than lows, the market is typically healthier, and vice versa. Like a check engine light in a car, market breadth can tell you if something is wrong, even if it is not apparent to the naked eye.
Image Source: Stockcharts.com
Wait for the Price to Breakout and Provide Clear Direction
Few things are more frustrating than owning a stock stuck in a consolidation phase. How does one know when a stock is stuck in the mud? Pay attention to the moving average – if the 50-day moving average flattens, your stock may be digesting gains. If you find yourself getting frustrated with a consolidating position, wait for a decisive breakout (ideally on heavy volume). For example, four months of frustrating price action could have been avoided by investors in market leader Nvidia ((NVDA - Free Report) ) if they simply waited for a decisive breakout to occur.
Image Source: TradingView
Traffic in Low Beta Stocks
Low beta stocks are those that historically exhibit lower volatility compared to the overall market. Low beta stocks like IBM ((IBM - Free Report) ) can be a refuge of stability in choppy markets characterized by price fluctuations and uncertainty. Investors can find the beta of a stock on the Zacks.com quote page.
Image Source: Zacks Investment Research