"Every success story is a tale of constant adaptation, revision and change."
-- Richard Branson
Eight trading sessions ago the market suffered its worst action of 2017. Many market pundits have been anticipating this setback for a while and where quick to declare that the long-awaited market correction was about to occur. They were even more convinced that a sizable downtrend was going to occur as the catalyst for the dip was caused by concerns over Donald Trump.
Of course, the bears turned out to be wrong once again. It was just another one-and-done correction that produced a standard V-shaped bounce and a return to flat action and limited volatility. It was a relief to the buy-and-hold investors and the indexers, but caused great consternation for traders that struggle to deal with a market that seemingly offers no real edge. The normal chart patterns don't operate like they have in the past, and the lack of volatility makes shorter-term trading very difficult.
The computer algorithms receive most of the blame for the illogical action, and so they should. There is no question that shorter-term action is heavily manipulated by non-human forces, but that doesn't relieve us of our responsibility for finding a way to profit in this market.
Where do we find an edge in this market? Short-term action lacks both volatility and logic, especially when it comes to the indices, so we need to turn elsewhere. The place to find an edge is in individual stock picking. Traders already know this and have turned to the FAANG names as a way to deliver relative performance. Action Alerts PLUS charity portfolio holdings Alphabet (GOOGL) and Apple (AAPL) , as well as Amazon (AMZN) , etc., have produced the great bulk of the gain in the indices lately. That is where the big funds have focused in their quest to outperformance.
There are also some pockets of stock picking that are working in other areas, but the key is that they have required longer time periods. Typically, it takes a week or two for technical patterns to develop better now, because of the lack of volatility. It may not be a timeframe that we like, but it is the time frame that is working.
A few recent examples I've had as picks lately are Health Insurance Innovations (HIIQ) , Ichor (ICHR) and NovoCure (NVCR) . All of them worked, but required patience. Read my weekend article, in which I discuss my approach to a longer timeframe with The Trade Desk (TTD) .
There is no question that the current trade environment is challenging, if you apply the approach we have in the past. The combination of V-shaped moves, limited volatility and narrowness requires a different approach, and that approach is increased patience and longer timeframes.
It may not be as fun or as exciting, and it is going to shift sooner or later, but as we look ahead to summer trading, that is the approach we need to take right now.
We have a slightly weak open on the way, as there is little reaction to the events over the weekend.
