As the age-old saying goes, “There is a time to go long, a time to go short, and a time to go fishing.” These words from Jesse Livermore, famed for his exploits during the 1929 Great Depression crash, resonate deeply in the heart of every investor facing choppy markets. Characterized by frustrating back-and-forth movements, choppy markets can leave even the most seasoned market players feeling as though they are being slowly whittled away, akin to “death by a thousand cuts.”
Today, against the backdrop of an equities landscape teetering on the edge of uncertainty, the ability to decipher market conditions reigns supreme. A remarkable 75% of a stock’s trajectory can be traced back to the prevailing market conditions rather than the inherent merits of the stock itself. In the realm of Wall Street, where subtlety reigns supreme, markets that oscillate invisibly between highs and lows pose the greatest danger. It is in these moments that the wise counsel, “If they don’t scare you out, they’ll wear you out,” rings loudest.
Identifying the Choppy Waters
Indicator 1: Moving Averages Standstill
A glance with the naked eye can be a powerful tool in identifying choppy markets. When major indices like the Nasdaq 100 ETF (QQQ), S&P 500 Index ETF (SPY), and Russell 2000 Index (IWM) find themselves wedged between their 50-day moving average and the 200-day moving average, it’s a signal of sideways market movement. Moreover, a stagnant 50-day moving average serves as a warning that prices are veering away from clear trends.
Indicator 2: Portfolio on a Rollercoaster
A portfolio whose equity curve dramatically shifts from upward momentum to consistent back-and-forth swings is a red flag that choppy waters lie ahead. Listening keenly to the market’s whispers becomes imperative in such times.
Strategies for Sailing through Choppy Seas
Method 1: Play the Ranges
For active traders, seizing opportunities in market weaknesses and capitalizing on strengths is vital. However, this strategy demands a skill level beyond surface appearances.
Method 2: Trade Light or Stay Put
Unlike a game of poker, investors lack the option of tapping out. Therefore, it is crucial for savvy investors to bide their time, allowing the market to reveal its next clear trend instead of swimming upstream against the tide.
Method 3: Seek Unrelated Opportunities
Active investing is not about blindly amassing positions but rather seeking out uncorrelated markets. While the US markets may be turbulent, foreign markets often present untapped potential. Chinese ADRs like Alibaba (BABA), JD.com (JD), and PDD Holdings (PDD) have shown positive movement even as the S&P 500 Index falters. Alternatively, shifting focus to trending commodities like the Silver ETF (SLV) or the Gold ETF (GLD) could offer a fresh perspective.
Preparing for the Incoming Tide
As the storm of choppy markets clears, investors should watch for signals like the 50-day moving average sloping upwards, stocks reclaiming the 50-day MA, and signs of relative strength in stocks that outperform the broader market.
Final Thoughts
Choppy markets may test the mettle of even the most seasoned investors. Yet, by deciphering and adapting to the prevailing market conditions in real-time, investors can not only survive but flourish in the long haul.