Big Stock Market Gains Are Made With Trending Moves, Not Volatile Moves

 | Apr 09, 2018 | 6:00 AM EDT
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Many have been saying, especially after last week, that volatile markets provide great investing/trading opportunities. I would say that is only half true.

While rising volatility does indeed ultimately scare the weak-handed holders of stocks into the strong-handed, this instability and unpredictability in the markets can also make it very uncomfortable, even for the strongest and most battle-tested buyers.

For decades the trajectory of the stock market has been up. There is clearly no argument about that. But even during that uptrend, and throughout history, moments of panic and terror have provided great opportunities to grab stocks.

Most recently, the financial crisis, or the Great Recession of 2008-09 brought world markets to their knees. With supportive central banks providing generous ultra-liquidity, which continues to this day, many investors scooped up the bargains of a lifetime. Bank of America (BAC) at $3, Goldman Sachs (GS) at $58, Amazon (AMZN) at $48, Apple (AAPL) at $14 and Netflix (NFLX) under $3, to name just a few.

These stocks were pounded to the ground during the financial crisis, and whatever credit you want to give to central banks, they moved higher over the years as markets trended higher, and volatility declined sharply. However, picking up a beaten-down stock happens at a moment in time. Holding on to it for potentially big gains is usually a longer-term journey.

As an investor and swing trader, I'm all in for the big and powerful moves. Hence, while I may trade options, which are by nature short-term trading instruments, I will often seek more time for the trades to work in my favor, preferring to hold long enough for a good-sized move to happen.

Short-term moves due to extreme volatility not only make it tough to get into a position, but there is the "falling knife" syndrome. I prefer to let a stock stop plunging first before reaching down and buying after/during a selloff.

Short-term traders of stocks, options or futures must keep a very tight leash on their trades and accept rather modest returns that can repeat themselves over and over again. It is rare when these traders get a huge pay day for taking risk they are not programmed to accept.

When markets begin trending and volatility trends (usually downward), then we'll see more opportunities to hold stocks longer. For now, it's simply a trader's market.

If you're not comfortable with the big moves up/down, then the sidelines are always a good place to be.

Goldman Sachs, Amazon and Apple are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GS, AMZN and AAPL? Learn more now.

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