How I'm Positioning Myself to Take Advantage of the Coming Market Volatility
Investors are growing nervous and I'm putting myself firmly in the reactive camp.
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The market is off to a rocky start on Tuesday morning as investors grow nervous about upcoming earnings, economic news and the election. Consumer confidence came in much higher than anticipated, which illustrates few worries about the economy, but it also indicates the potential for a rebound in inflation.
Interest rates continue to rise, and the the seven-to-ten year bond IWF is now at its lowest level since July. Also, in the housing market, DR Horton DHI blew up on a weak report, and the entire sector is struggling.
Doug Kass does an excellent job in this article of presenting the bearish argument against this market. He offers compelling logic and unassailable facts, but what should you do with this information? If you believe that Kass is correct, what action should you take?
The answer to that question depends on your trading and investing style. There are two basic approaches to the market: anticipation and reaction. Anticipatory investors formulate a thesis and then position themselves and prepare for it to be fulfilled. Reactive investors will contemplate various market theories but will not act until there is a shift in the price action that indicates that something is changing.
The business media loves big macro calls. They favor guests who make sensationalistic predictions about what lies ahead. Those stories attract a lot of attention, but no matter how strong the arguments might be, timing is always the hard part. No one knows when the market is finally going to recognize the wisdom of these investment savants.
Reactive investors don’t receive as much media attention because they make little effort to nail the exact moment that the market turns. By definition, they will only start to change their positions after signs of a top have already been formed.
Most trend followers and momentum investors are reactive. A good example of a reactive approach is Investors Business Daily, which uses a methodology that becomes bearish only after a number of distribution days and a breakdown in the charts.
I am firmly in the reactive camp. While I appreciate Kass’ cautious comments and will consider them in formulating my approach, I will not take any action on them until there is a shift in the price action.
The main thing I do when the market starts to look vulnerable to a reversal is to tighten up the stops on individual stock positions. I don’t want to give back big gains, so I will sell individual positions more aggressively on minor technical weaknesses. This morning, I cut back a couple of positions in names like Powell Industries POWL and Shift4 Payments FOUR due to minor technical weaknesses.
My goal is to let my individual positions tell me when I should be more bullish or bearish. If market conditions start to weaken, then I will be forced to sell more positions as the charts falter. If charts are poor, I will find fewer buys because the setups won’t be there. This combination of more sales and less buying automatically starts to increase my cash position without making any macro market prediction.
There is the potential for some big moves on news in the next week, and I’m positioning myself so that I can take advantage of the volatility rather than fear it.
At the time of publication, DePorre was long FOUR and POWL.
