Participating In Volatile Markets Requires Skill & Discipline

Participating In Volatile Markets Requires Skill & Discipline

$DIA, $SPY, $QQQ, $VXX

Wednesday, the DJIA rose nearly 200 pts, reversed, and finished session  up 122.10 pts, demonstrating the overall increased stock market volatility.

Over the past several months DJIA moves of several hundred points seem have become the rule,  not than the exception, and happen whether there is market making news or not.

These wide swings affect and are affected by global markets that are also uncertain.

I do expect that this market volatility will be with us for some time to come, as it is part of a new set of economic, financial, policy and technical transitions.

This action will result in occasional price overshoots, contagion within and across market segments, unusual asset class correlations and some sharp rebounds.

Below are the Key investment considerations for participants in this non-fundamental market scenario, as follows;

1. Lookout for good names trading at cheap price marks: Sudden market Southside actions, can drag down even the best securities, offering investors interesting opportunities.
2. Use the sharp market action to trade up in quality: The sudden market retracements, such as the on we are seeing now, provide an opportunity for participans to upgrade their portfolio.
3. Use measured investing techniques such as dollar cost-averaging when taking on added risk: The change in the volatility paradigm adds to the problems of asset classes already destabilized by fundamental demand and supply shocks, such as oil and emerging markets. The scaling of such investments must be done in a way that enables the holdings to be maintained through wild and scary moves.
4. Think of cash as part of the strategic allocation in a diversified portfolio: With asset class correlations becoming less predictable and dependable, the traditional bond/equity/commodity)portfolio diversification does not offer participants a strong measure of risk mitigation. As a result, prudent participants now hold a higher-than-normal cash balance, dry powder for opportunity and  for strategic risk management.
5. Look for opportunities that have not been directly affected by Fed, ECB, and PBOC liquidity injections: Hard to find, but can be especially remunerative. Startups in new tech appear very attractive, as do transformational tech-driven sectors in the more robust emerging economies.
6. Obvious divergences in fundamentals do not always translate to financial market out-performance: Although the economic outlook for the US remains brighter than some other countries, the financial market out-performance may not be as strong in general terms. Valuations have moved far North. Traditional indices for stock and corporate bond exposures are not insulated from developments in the rest of the world. Many US companies have lots of cash on their balance sheets. That should be a Key factor for those wishing to go long US corporate risk, read Stocks/Bonds,  as compared to like assets world wide.

Savvy money goes to work on quality leaders making good moves. We have seen a 1st run at a rally on the chance that a double bottom was marked last week, with all Key elements in place since the August selloff.

Hang on, even with that, enter on quality and keep dry powder.

If the move is going to continue to new highs, there will be opportunity to put money to work at good entry points. If Wall Street reverses, and it can do quickly, tight stops may help stop The Invisible Hand from taking your optimistic money. And you will have dry powder if the next move South breaks the Key support which is is sure to do sooner of later

Remember, the name of this Wall Street game is to make money, and there will always be a trade.

Stay tuned…

Paul Ebeling

HeffX-LTN

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