Imagine this scenario: A stock is down 5.8% in about ten days, and then up 5% ten days later. The speed at which these stocks reverse is so quick that if you were long or short, you might need to wear a neck brace to protect yourself from whiplash. If you took a wrong turn, you might get side-swiped or run right off the road.
Analogies aside, market uncertainty creates fear. Fear results in a surge of players to the sidelines for safety and protection. Most will wait for the all-clear signal to arrive, but when that occurs, the big moves have already happened. If you stepped away from trading at the end of 2013 and are just getting started in the new year, it seems like nothing really happened. The SPX 500 is up a tiny fraction since year end and the Nasdaq and Russell 2K are up nicely and on pace for a decent showing this year.
Volatility spikes over the past year or so have been the rule rather than the exception. Some pretty nice patterns and trends have developed (see the chart below). The panic from these fear spikes have provided great chances to get on board and go long on this market. Coupled with severe oversold readings, current conditions have led to powerful moves.
So, when is it the right time to get on board or stay put? What if you exited in late January and are now scratching your head, wondering what the heck happened. After all, this market rally off the 2009 lows is now about five years long, and while we don’t see technical signs of that coming to an end, this is one of the longest recoveries on record.
The late January swoon was just a release of pressure among those looking for an excuse to sell and book profits. Who wants to be the first one off the boat if it’s going to keep sailing? There are a million reasons to sell but only one reason to buy. Will we drop and have another opportunity again? I’ll follow the pattern until it no longer works. We always advocate taking profits when YOU want to do it, not when the market forces you.
If we pay attention to the market and trust the trend, then even the sharpest moves can be handled and managed properly. Naturally, the bulls’ confidence is high as the markets reach up and tag new levels, but because we are all more inclined to panic or run for safety at the first sign of trouble, this is where the volatility comes in – and with it, some opportunity.
If you booked big gains in 2013, you definitely do not want to see them disappear, and it seemed like that was the mindset in January. However, those who stayed the course and even bought the dip (for the sixth time in a row) have been rewarded. The rest will buy up at higher prices, and the fear of missing out goes on.