The Easiest Mistake Investors Make in a Volatile Market
In a market where a bounce could either turn into a new trend or a failed bounce, ask yourself this question.
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Following the very energetic market action on Monday, it is very mixed on Tuesday. Breadth is almost exactly even, and there is roughly the same number of stocks hitting new 12-month lows as those hitting new 12-month highs.
The Magnificent Seven MAGS is leading again with a gain of about 0.5%, but the 200-day simple moving average is resistant so far. Tesla TSLA is stalling out at the same moving average overhead. Nvidia NVDA is the laggard again.
Dip buyers have shown up and bought weakness that was created by a lower-than-expected consumer confidence number. Lagging consumer confidence is helping to suppress interest rates as well.
With the market at a juncture where a bounce could either turn into a new trend or a failed bounce could turn into a deep correction, it is particularly important to be clear about your trading style. Are you a long-term investor trying to accumulate stocks that you can hold for months or years, or are you an aggressive trader trying to capture gains created by increased volatility?
The biggest mistake that investors make in a volatile market is style drift. Failed trades turn into long-term investments, and long-term investments are dumped as impatience builds. These mistakes are emotion-driven, and it is very important to be cognizant of what you are feeling as you look at the market and your stocks.
I view this as a market primarily for very short-term trading. There is little reason to put substantial funds into longer-term holdings right now because there are few good technical setups, and the risk of further downside is extremely high. I’m not at all concerned that the market will run away without me.
On the other hand, the volatility creates opportunities for very short-term trading if that is your inclination. I actively trade the same names that I want to hold as long-term investments. I don’t just keep buying and increasing my positions. I try to reduce positions with profit-making trades.
I do not see much opportunity in the market, so I’m not going to force things. If I can pick off a few good trades, I’ll be happy, and it will help me maintain the necessary patience while the market decides what it will do next. Sometimes, the best trade is no trade.
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At the time of publication, Rev Shark had no positions in any securities mentioned.
