The technical condition of the indices are in good shape and volume should pick up Friday because of option expiration but the lack of movement in the market is making for very difficult trading. The S&P 500 is essentially unchanged over the last six trading days and is at the same level it was at back in late July.
What is particularly remarkable about this sedate action is that there has been no shortage of news flow. There have been plenty of potential catalysts -- both positive and negative -- but it hasn't produced sustained trends. The Fed interest-rate decision this week was well anticipated and expected to elicit a response but after a brief intraday dip, the indices are right back where they were.
How do we deal with this sort of action?
There is a great temptation to be more anticipatory since flat action of this sort will eventually give way to a big move. Everyone wants to be ready to catch the next trend so there is strong motivation to start positioning now in hopes of catching the right move.
Here are the important issues to keep in mind when navigating a trendless market:
- Stay reactive but don't overreact to minor moves. While many "expert" pundits claim to know what the market is going to do next, the best course of action is to forego the predictions and watch the price action. Clues as to what will happen next will develop but, more likely or not, there will be some surprising news that causes the next flurry of action.
- Be patient. It is frustrating when the market isn't moving much and there will be a strong inclination to put on trades just to stay active. Forcing trades with questionable technical setups is very tempting but often results in a series of minor losses that add up over time.
- If you looking to build positions in favorite stocks then do so very slowly. The best strategy is to establish a position but to not lever it up until there is better volume and more movement. Traders often end up dumping good stocks because they build too big of a position too quickly and their emotions come into play.
- Keep in mind that the "experts" are unlikely to correctly predict what the market will do next. There will be many theories and predictions about how things will develop going forward but no one will have it exactly right. Just look back at recent history and how no one saw the big sector rotation coming or the bubble and reversal in bonds. There was no way to effectively forecast what occurred but if you stayed reactive you had a better chance of profiting.
- Stay optimistic. There is no doubt that this action will eventually lead to a new crop of opportunities. I don't know when or how it will occur but the one great certainty of the stock market is that it will evolve and go through various cycles. We just have to be patient, protect capital and be ready to move when the time is right.
Option expiration should liven things up a little Friday and perhaps we will see some "don't short a dull market action." However, make no mistake, this is a tough trading market that is lacking strong emotions. It is the nature of the beast at times and the best move is to embrace it.