For the past few years, investing has seemed remarkably straightforward.
Every time the market stumbled, buyers stepped in. Fears over tariffs, inflation, trade wars, higher interest rates, economic conditions, or geopolitical unrest were soon swamped by the next wave of momentum-driven buying.
The strategy of “buy the dip” worked so many times that some folks stopped worrying about risk altogether.
But one thing I’ve learned from over four decades of trading is that markets don’t stay the same forever. They have a habit of biting when you least expect it.
And right now, there’s a subtle shift taking place this earnings season. Markets have become far less predictable. We’re seeing much sharper rotations between sectors and leading stocks. Daily swings have also become much bigger, with an increasingly wide gap between winners and losers.
In short, we’re returning to a genuine two-way market. And those who don’t appreciate that could soon find themselves increasingly frustrated…
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**The investment results described in these testimonials are not typical; investing in securities carries a high degree of risk; you may lose some or all of the investment.
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During the massive bull market run, investors have been conditioned to think that patience simply meant holding on through pullbacks. But as market conditions evolve, patience has taken on a new meaning.
Patience means waiting for the right opportunities rather than feeling compelled to remain fully invested and wait for the next upswing to carry you along.
That’s been one of the guiding principles throughout my career. I’ve never tried to trade every move. In fact, trying to capture every rally or sell-off leads to overtrading, and that in turn can lead to unnecessary mistakes.
Instead, I prefer to protect my capital until the odds are firmly tilted in my favor. Those opportunities often arise when investors overreact – either becoming excessively optimistic or far too pessimistic.
Because eventually, even the most ardent buyers or sellers run out of steam.
The great news for us as traders is that the current environment is starting to generate more of these trading opportunities. And I intend to put them to use.
Surging Treasury yields are forcing investors to reassess valuations. Earnings season is exposing which companies can justify their lofty valuations.
At the same time, the Federal Reserve is getting less hands-on in managing market expectations. As a result, investors will need to interpret economic data rather than relying on policymakers to signal every move well in advance.
But while some folks might find the Fed’s new approach daunting, I see even more opportunities ahead.
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Large daily swings often have less to do with a company’s long-term prospects than they do with short-term positioning and outright emotion.
For many folks, seeing a stock move drastically sparks all kinds of emotions: fear, greed, FOMO (fear of missing out), etc.
These emotions help drive stocks to extremes, overshooting to the upside or downside. These types of dislocations are where options become such a valuable tool.
Rather than committing large sums of capital to buying or short-selling shares outright, options allow us to express a view on the market (or a stock) with clearly defined risk. We always know what we’re prepared to lose before we enter the trade. (That’s the premium we paid for the option.)
Meanwhile, options allow us to profit from upside or downside action. In a market that’s becoming far more uncertain, that’s the kind of risk/reward profile that I want.
To be clear, all this doesn’t mean the bull market is going to end tomorrow. It doesn’t mean that every dip is the prelude to a much bigger leg down.
But it does mean that the market is becoming more discerning. As we’ve seen these past couple of weeks, you can’t just jump on any Mag 7 stock and wait for the next wave of buying to carry your position higher.
Investors are paying closer attention to valuations, earnings quality and economic data. That’s leading to bigger price swings and a genuine two-way market, meaning more trading opportunities for those willing to remain patient.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
