Can Volatility Be Good For Traders?
March 6, 2018, 10:29 am
Remember when the market’s only direction seemed to be up? We were spoiled by months without the S&P 500 moving more than 1% between open and close, the way it used to be about once a week on average. Now volatility is back with a vengeance. We’ve endured 20 volatile days in a row as stocks try to make up for lost time.
Last week’s turn on the rollercoaster ended with the S&P 500 down 3.2%. My Absolute Capital Return positions fared much better thanks to our high-tech heavyweights Nutanix (NTNX) and Xilinx (XLNX). We locked in gains in XLNX on Tuesday and then NTNX this Monday.
The key to our long-term success is trades like XLNX: during the 15 market days we held it, our capital was moving at an annualized rate north of 170%, much faster than what the S&P can provide in anything but the shortest spurts. Amass enough of those quick hits together and you have the perfect recipe for beating the market over time.
Keeping our holding periods tight also works in our favor when the markets are unsettled and we need to take advantage of the fleeting swings without getting stuck when the tides turn. We stick with the stocks that move and cut the ones that go in the wrong direction even if the underlying fundamentals are solid. I want to keep our money working for us, so we’ll rotate our money into other names and circle back once the fundamentals and chart are lined up again.
A lot of the noise in the market tends to revolve around long-term scenarios that only those with a crystal ball would be able to predict accurately. We saw plenty of that last week when the broader indices went spinning after Federal Reserve Chair Jerome Powell left the door open for a potential fourth rate hike. Things took an even uglier turn after President Trump dropped the trade bomb, triggering fears of a trade war and raising the odds that the global economy is headed into unknown territory. Wall Street doesn’t like sudden shocks because one shudder in the here and now can throw off positions meant to pay off down the road.
Here’s the thing, though. Volatility is good for traders. A sudden upside move unlocks substantial value all at once, reaping double-digit profits in weeks instead of years. And as long as we stay liquid, sudden moves to the downside widen our trading universe as we find more attractive entries on stocks that would have been otherwise off limits.
There’s always a rally somewhere, and by staying disciplined and sticking with our trend trading strategy, we remain open to the market’s ability to pay out under a wide range of conditions. We can invest across sectors, themes and even international markets, and we can also selectively short the weaker sides of the market when the right opportunity arises.
We’ve locked in four double-digit winners since February 20, and I expect the gains to keep coming as we continue trading the best stocks. Make sure to sign up for your risk-free trial of Absolute Capital Return so you can be ready for profits before my next Buy Alert triggers.