How To Trade The Crashing Markets

Lots of finger-pointing has taken place. Was it Buffett selling Apple? The jobs report? The unwind of the Japanese carry trade, which is essentially nothing more than borrowing at low rates in Japan and investing at higher yields in the US. Or was it the re-pricing from inflation concerns to recession worries?

Regardless, the reality is some stocks had already fallen into bear market territory in recent weeks. NVIDIA is down 35% from its highs. Even Apple approached bear market territory at the open on Monday after falling 17% from its highs.

So how do you trade this volatility?

Key Points

• Market volatility is the new normal in the market and the reasons why may be numerous.
• During market volatility, avoid impulsive trades. Instead, wait for stabilization and look for favorable setups and entry points with a good reward-to-risk ratio.
• Review strong and weak sectors, identify top stocks in strong sectors, and monitor a watchlist daily to spot outperforming opportunities in a declining market.

How To Trade The Market Madness

Professor Jeremy Siegel of the Wharton School of the University of Pennsylvania was on CNBC calling for a 75 basis point cut followed by another in the next few months for a full 1.5% Fed rate cut. He didn’t hold back in taking aim at the Federal Reserve for having first waited too long to hike rates and secondly waited too long to lower rates. Goldman Sachs appears to be on the same page and hiked their odds of a US recession next year from 15% to 25%.

But none of these things really matter to the average trader with a brokerage account, 401k or SEP IRA. The real thing to expect is volatility now. At the market open on Monday, the major market averages were down almost 5% before buyers stepped in. Apple hit $200 per share before rallying 6% from the lows of the day. NVIDIA fell to $92 per share before soaring by almost 10% also.

This type of action isn’t necessarily even for the courageous but often the foolhardy. Wild swings are not the friend of conservative traders so much as they are for speculators. For all but the adept few who are glued to their screens daily, the better bet is to stand back and observe the trend, which is bearish and anticipate that it will lead to a better and attractive buying opportunity later in the year.

As tempting as it is to buy the dips, the market has a habit of humbling those who are quick on the draw but light on conviction. So, what should you do? The most successful traders now will wait for some stabilization, and for attractive setups, and entry points that favor reward over risk. The low may be in, but betting on it is speculation. To generate alpha, and have an edge, it’s better to let the market confirm the bottom is in than to anticipate it.

3 Steps To Take Now

The first step now is to review which sectors are showing strength and which are very weak. Next find the stocks in the winning sectors that are doing best. And finally put them on a watchlist and keep a close eye on them daily. On Monday, IT was down the most and Utilities down the least. Nothing was doing well, so it’s time to wait, and watch until some sector shines and then spot the stocks that are winning in those sectors.

In the words of Stan Druckenmiller, there will always be 20 or so stocks out of 5,000 that have great fundamentals and technicals. By filtering out everything that is in the red, and keeping an eagle eye on what’s green when the market is tanking, you can get a quick pulse on what is outperforming and likely to do so if the bearish trend continues.