How are you supposed to trade wild market movements, which seem to be happening frequently? Just last week, we had a day (Monday) when no news came out but stocks were bludgeoned. Perhaps traders were bracing for potentially negative remarks from Fed Chair Jerome Powell and the November jobs report. In any case, there was no bid and we saw a retreat back towards 4K. This was a shock to the recently minted bulls, who continue to look for more upside.
Then we move to Friday. The jobs report for November was strong on all fronts: job creation, wage growth and tightness in the labor market. These are all characteristics the Fed would like to see slow down, hence the markets immediately dropped some 1.5%. But as we are in a seasonally strong period for stocks, investors and traders are looking for the silver lining, so markets rallied nicely off this report. Good news eventually delivered good results.
Taking a glass half full approach seems to be paying well if you wait for the anxiety to subside. This is a stark difference from what we saw happen back in the summer, when a heavy drop was a signal for bearish traders to pile on and drive markets down. Of course, the algo traders feast on every word and send trades through without emotion, but it leaves the rest of us to figure things out and then move forward.
How to trade wild market movements
Pay attention to volatility. It is low right now, hence the market is not expecting big moves but when they do occur like Friday, there is a chance of a quick move back to the start.
Next, look at the market conditions. It seems most people are out talking about recession in 2023, yet the market continues to rally. It’s up nicely in November. Is the market ignoring the signs? Possibly, but when money is flowing into stocks strongly as it is now, you don’t fight the momentum.
