We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
After a strong stock market recovery in the back half of 2023, stocks continued to enjoy smooth sailing into January of the new year. However, though equity markets may experience periods of low volatility, historical trends and data suggest that volatility is an inherent and cyclical aspect of these markets. Charlie Bilello, Chief Strategist at Creative Planning, pointed out yesterday that “The S&P 500 fell 1.6% today, the first daily decline of 1% or more this year. Since 1928, the average year has 29 of these declines. It was a very mild January up until today – expect more volatility to come.” Knowing that the data favors more volatility ahead, now is the time for investors to understand how to handle such volatility. Below are x ways to handle volatility:
Know Your Time Frame
Knowing and understanding your investment time horizon is essential at any time but is especially important to know during high volatility periods in the equities market. Below are two examples
· Long-term or retirement investment: In this time horizon, investors should understand that volatility is inherent, but the general market will rise in a long enough time frame - nothing should change.
· Active/intermediate investors or traders: These investors may want to wait for the smoke to clear.
Since there is not much to do for long-term investors other than stay the course, let’s dive deeper into three important ways active investors can handle volatility:
Lower your Position Size & Get Off Margin
Excessive position sizes during volatile market conditions can harm traders for several reasons. High volatility amplifies price swings, leading to an increased risk of significant losses. Top-heavy positions magnify the impact of adverse market moves and cause poor, knee-jerk decisions.
The fix: Get off margin and lower your position size until the smoke clears. A good rule of thumb I have implemented is to never risk more than 1% of my capital on a trade. In other words, if my account is $100,000, I should never lose more than $1,000 on a trade. This simple risk mitigation framework allows me to be wrong often and not blow up my account.
Moving Average Slope Can Provide Clues
Active traders can alleviate many headaches by simply trading in sync with the trend. When a moving average is flat or trending down, it’s best to avoid overtrading. Conversely, the odds are stacked in the bull’s favor when a moving average is trending higher. Below is an example using the Nasdaq 100 ETF ((QQQ - Free Report) ):
Image Source: TradingView
The fix: The 50-day moving average slope is the best timeframe to watch for intermediate traders. Consult a chart and ensure the moving average’s slope is trending higher if you are trading to the long side.
Gravitate Toward Lower Beta Stocks
Beta measures a stock’s volatility relative to a market index; lower beta stocks tend to be more stable and experience smaller price swings than the overall market. In volatile conditions, these stocks are less risky and more conservative. You can find a stock’s beta on the Zacks.com homepage.
Image Source: Zacks Investment Research
For example, tobacco giant Altria ((MO - Free Report) ) has a .66 beta, meaning its expected volatility is lower than the S&P 500 Index. The low beta makes sense – regardless of the economy or market, people will still smoke cigarettes. Other low-beta stocks include discount retailers Dollar General ((DG - Free Report) ),Walmart ((WMT - Free Report) ), and Costco Wholesale ((COST - Free Report) ).
Bottom Line
As investors navigate the dynamic landscape of the stock market, the certainty of volatility becomes apparent. Investors can combat volatility by decreasing position size, ensuring the market is in an uptrend, and gravitating toward low-beta stocks.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Volatility Ahead? 3 Ways to Tame it
Death, Taxes, & Volatility
After a strong stock market recovery in the back half of 2023, stocks continued to enjoy smooth sailing into January of the new year. However, though equity markets may experience periods of low volatility, historical trends and data suggest that volatility is an inherent and cyclical aspect of these markets. Charlie Bilello, Chief Strategist at Creative Planning, pointed out yesterday that “The S&P 500 fell 1.6% today, the first daily decline of 1% or more this year. Since 1928, the average year has 29 of these declines. It was a very mild January up until today – expect more volatility to come.” Knowing that the data favors more volatility ahead, now is the time for investors to understand how to handle such volatility. Below are x ways to handle volatility:
Know Your Time Frame
Knowing and understanding your investment time horizon is essential at any time but is especially important to know during high volatility periods in the equities market. Below are two examples
· Long-term or retirement investment: In this time horizon, investors should understand that volatility is inherent, but the general market will rise in a long enough time frame - nothing should change.
· Active/intermediate investors or traders: These investors may want to wait for the smoke to clear.
Since there is not much to do for long-term investors other than stay the course, let’s dive deeper into three important ways active investors can handle volatility:
Lower your Position Size & Get Off Margin
Excessive position sizes during volatile market conditions can harm traders for several reasons. High volatility amplifies price swings, leading to an increased risk of significant losses. Top-heavy positions magnify the impact of adverse market moves and cause poor, knee-jerk decisions.
The fix: Get off margin and lower your position size until the smoke clears. A good rule of thumb I have implemented is to never risk more than 1% of my capital on a trade. In other words, if my account is $100,000, I should never lose more than $1,000 on a trade. This simple risk mitigation framework allows me to be wrong often and not blow up my account.
Moving Average Slope Can Provide Clues
Active traders can alleviate many headaches by simply trading in sync with the trend. When a moving average is flat or trending down, it’s best to avoid overtrading. Conversely, the odds are stacked in the bull’s favor when a moving average is trending higher. Below is an example using the Nasdaq 100 ETF ((QQQ - Free Report) ):
Image Source: TradingView
The fix: The 50-day moving average slope is the best timeframe to watch for intermediate traders. Consult a chart and ensure the moving average’s slope is trending higher if you are trading to the long side.
Gravitate Toward Lower Beta Stocks
Beta measures a stock’s volatility relative to a market index; lower beta stocks tend to be more stable and experience smaller price swings than the overall market. In volatile conditions, these stocks are less risky and more conservative. You can find a stock’s beta on the Zacks.com homepage.
Image Source: Zacks Investment Research
For example, tobacco giant Altria ((MO - Free Report) ) has a .66 beta, meaning its expected volatility is lower than the S&P 500 Index. The low beta makes sense – regardless of the economy or market, people will still smoke cigarettes. Other low-beta stocks include discount retailers Dollar General ((DG - Free Report) ), Walmart ((WMT - Free Report) ), and Costco Wholesale ((COST - Free Report) ).
Bottom Line
As investors navigate the dynamic landscape of the stock market, the certainty of volatility becomes apparent. Investors can combat volatility by decreasing position size, ensuring the market is in an uptrend, and gravitating toward low-beta stocks.