How to Trade Around the “False Move” Market Frenzy

With the first quarter of 2023 behind us now, plenty of investors are scratching their heads.

The major U.S. indices finished in the positive. But there was a huge difference in performance…

The Nasdaq 100 ripped higher, gaining nearly 20%. Yet the S&P 500 closed out the quarter up only around 6-7%, with the Dow Jones up less than 1%.

A big part of the Nasdaq’s outperformance came from a huge turnaround in tech and communications stocks – among last year’s worst performers.

However, what stood out this last quarter was how these indexes interacted…

There was barely a day when they were all heading the same way. In my entire career, I’ve never seen a time when one index is down for two days, while another is up for two days.

Then two days later, they switch places and the indexes that were up are now down. That’s very uncommon in a traditional bull market.

However, I’m not convinced things are going to remain as rosy moving forward…

Challenges Ahead

Although I don’t want to sound too bearish (we always need to let prices dictate what we do), there will be plenty of challenges ahead.

The Nasdaq was up close to 20%, but its sales growth is estimated at just a quarter of that. So, the upcoming earnings season could be a real doozy…

Especially if earnings come in well under expectations.

The disconnect between inflated tech stock prices and flagging fundamentals could pull the rug out from under the market. And if that happens, we could see the Nasdaq receive a drubbing.

Plus, there’s been another dynamic at play…

This past quarter, the Nasdaq has benefited from the massive uncertainty in the banking sector. Big Tech became a type of “safe haven” after the Silicon Valley Bank and Silvergate collapses.

When this situation unwinds, that could add another level of pressure on the already overpriced tech sector.

Beyond that, with the economy slowing, we could be looking at a major slowdown and recession on the horizon.

So far, job cuts have mainly centered around Big Tech. However, we’re starting to see some of those job cuts more broadly.

Demand is waning as interest rates really start to bite. And companies are preparing themselves for a downturn.

In the meantime, the key is to sit on the sidelines and be patient for the right setup. That’s often the hardest part about trading.

We also must re-evaluate how we go about our trading…

Adjust to the Conditions

With so much uncertainty around, we don’t want to be too aggressive with our trading.

When the markets aren’t moving like we expect, it’s easy to get pulled into a false move. And before you know it, you’re playing catch up.

So at times like this, I reduce the size of my positions. I’ve done this for as long as I can remember. If you typically trade 10 options contracts, I would drop that back to around five or six.

Couple that with a successful trading strategy like mean reversion. And gradually, build your P&L (profit and loss) without taking a major hit if a trade goes wrong.

Trading small enables you to stay in positions longer. That means you’re not thrown out of a trade prematurely before it’s had time to work.

By adjusting your trade size to the conditions, you can build up your account by taking regular smaller profits.

And that way, you can be more aggressive and take bigger profits when the situation becomes clearer.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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