Whichever way you slice it, there’s been plenty being thrown at the market over the past couple of weeks.
First came the Democratic clean sweep of Congress in the midterms, followed soon after by the huge rout in technology stocks. That sent the under-pressure Nasdaq tumbling nearly 6.5% in a day, while volatility surged. The CBOE Volatility Index (VIX) jumped from under 17 to over 28.
Beyond that, plenty of other macroeconomic factors are playing out.
Data earlier this week reinforced fears that inflation remains elevated. That came on top of a strong jobs report last week that exceeded expectations (up 165,000 against forecasts of 65,000).
These figures helped push expectations of a rate hike at the Federal Reserve’s meeting next month to a near certainty. What’s more, a growing number of traders are now expecting a 50 basis point hike rather than 25.
Meanwhile, after retracing from two-decade-plus highs, Treasury yields could be setting up for another run higher.
With so many forces pulling markets in different directions, it’s tempting to sit out and leave things to the big institutions.
But what retail traders sometimes don’t realize is that they also have an edge. Better still, they’re often in a much better position to exploit it.
Here’s why market turmoil is an opportunity for you, not a reason to sit out…
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One common misconception retail traders have is that they’re competing against the big Wall Street firms. They feel they don’t stand much of a chance.
However, that couldn’t be further from the truth.
Many of those institutions manage billions of dollars and operate under strict mandates. They can’t easily jump in or out of positions or choose to sit on the sidelines. Many need to remain fully invested to meet their fund’s obligations.
Because those funds often chase the same benchmark, such as the S&P 500 or Nasdaq-100, they tend to hold similar positions. That means they’re heavily exposed to the benchmark’s biggest stocks. Otherwise, they risk underperformance.
While that provides a tailwind when the mega tech stocks rally strongly, it leaves those funds increasingly exposed to just a handful of companies. As we saw with the AI selloff last week, that exposure can become a liability when sentiment turns.
What’s more, even if those fund managers believe the market is still falling, their mandates and benchmark constraints can make it difficult to reduce their exposure.
This is where retail traders have an advantage.
For a start, you don’t have to be invested in anything. You have the luxury of sitting things out for as long as you like. While that might not seem like such a big deal when the market’s in full rally mode, it makes a massive difference when markets are tanking.
Imagine having to stay long 60% to 70% equities when markets are in a sustained downtrend. A retail trader doesn’t have to deal with the same constraints.
Another major advantage is the ability to change course quickly…
When markets are reacting to rapidly changing events, sentiment can shift in an instant. A change in expectations around interest rates, for example, can completely reverse the market’s direction.
In those situations, big funds often don’t have the ability to react quickly. They can’t dump tens of billions of dollars’ worth of stocks into the market. So they often have to ride things out.
But retail traders don’t have those same limitations.
They can pivot instantly by cutting or adding to a position with just a few clicks. Plus, they’re not limited by a stock’s market cap and liquidity – they can trade stocks too small for large funds to consider.
That’s the retail trader’s real edge: flexibility.
You don’t have to be in or out of the market. There’s no rule saying you have to trade every day. You can wait for the market to show its next move before you commit any funds.
So when you’re next watching all the turmoil unfold, don’t fret about all the things you don’t have –ike access to institutional research, an army of analysts, or billions of dollars at your disposal.
As a retail trader, you have your own advantages.
And in a market this unpredictable, staying on the sidelines, protecting your capital, and waiting for the right opportunity is a powerful edge.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. One of my favorite ways of trading the market right now is through prediction markets. My readers just had the chance to bring home a 233% win this week, and we’ve been maintaining a 92% win rate since I started sharing these trades earlier this year.
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