Iran, AI, Chaos: Here's How to Navigate This Tough Market
It is extremely difficult trading, but here is the good news.
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It is very ugly out there this morning. Early in the day, breadth is horrendous, with only 12% of stocks in positive territory, as hopeful investors who were trapped by Monday's morning action are now showing signs of panic.
The Russell 2000 (IWM) small-cap index, which was the best performer with a gain of 0.9% on Monday, is getting slammed with a loss of 3.5% on Tuesday. Currently, there are no safe havens other than oil and a couple of big retailers like Target (TGT) and Costco (COST) .
Like everyone else who is active in the market right now I am finding it very difficult to make progress. I have taken a few hits and am annoyed at some of my decisions, but I remain very optimistic about the opportunities that will eventually develop. If you read my columns you know that I am always optimistic. Not optimistic that the market is going to go straight up and all my stocks will move higher, but optimistic that the market will present us with a bounty of opportunities and if we are vigilant, disciplined, and willing to work hard we will realize substantial profits.
Two Things Make This Market Tough
The first is that the news flow is chaotic and the uncertainty is substantial. We not only have the uncertainty of what will happen with the Iran situation, but there is growing concern about the economic ramifications, including higher oil prices and inflation that is already proving stubborn. On top of this we are undergoing a significant transition in AI as the industry matures and evolves. AI is clearly an economic revolution, but it is developing so quickly that it is causing substantial disruption across the supporting infrastructure and many industries simultaneously. It is extremely chaotic and no one can predict how it will eventually unfold.
The second thing that makes a market like this so difficult is the disconnect between price action and valuations. Stocks are being bought and sold for reasons that have little to do with their true worth. Indexes and exchange-traded funds are baskets of thousands of stocks that don't distinguish between good fundamentals and bad. Everything in these vehicles moves in tandem to some degree and the innocent get punished alongside the guilty.
It is very easy right now to find stocks with a long list of positive metrics and compelling valuations that are stumbling around and struggling. The dilemma you face as a trader is real. The price action may take the stock even lower and the disciplined thing to do is take a stop. On the other hand the price action may not be rational and if you move to the sidelines too quickly you may miss the upside you were anticipating. There is no clean answer. That tension is simply part of operating in this kind of environment.
Get Control of Your Emotions and Embrace the Reality
The solution is to get control of your emotions and accept that irrational market action is part of the game. It happens from time to time and there is nothing you can do to prevent it. Getting upset or depressed will only make it harder to do the right thing when the moment calls for it.
My best advice is to start each day with a fresh slate. You do that by marking to market. Treat each stock as if you bought it that day at the current price. Forget whether you are sitting on a large unrealized loss or gain. At this moment you are flat. Now make a plan. How will you handle the stock if it keeps falling? Do you take a stop or buy more? The important thing is that you act. You have to have a plan and then execute it. Force yourself to make a decision rather than letting the market make it for you.
The inclination of most people in a market like this is to stick their head in the sand and ignore what is happening. They don't even want to look at their positions and that is understandable. But avoidance only makes the problem worse. If you try the mark-to-market approach you may find you have much better control over those emotions and the decisions that follow from them.
At the time of publication, DePorre had no position in any security mentioned.
