One of the most interesting, and potentially lucrative, aspects of trading is navigating big news-driven swings in the market. There were some particularly good illustrations of this last week as the indices danced around to headlines about the Fed, a slowing economy and trade wars with China.
The action was particularly volatile on Friday as market players reacted to some ill-advised and highly emotional tweets from President Trump. Expectations were high that there would continue to be some reverberations on Monday as market players tried to stay one step ahead of what would happen next.
However, the market is a very perverse beast at times and rather than continue to jump around in an erratic fashion, it did what was most likely to frustrate the greatest number of people-it went dead.
After some big moves prior to the open on Monday, the indices traded in a narrow range. There was a last-minute buy program that pushed the indices to close at intraday highs, but the action during the day was quite sedate. Breadth was 5-to-2 positive, but twice as many stocks made new 12-month lows versus new 12-month highs.
Tuesday morning, the indices are indicated near flat in the early going. There aren't any major news headlines on the wires, so the editors are rolling out the recent standby: "Stocks up on Trade Hopes."
It is remarkable how quickly things have shifted from the emotionality of Friday's trading to dull and listless Tuesday morning. It is a good example of the challenges of navigating the market. Not only do we need to determine market direction, but we have to figure out if there is going to be any direction at all.
At this point, the only rational strategy is to wait for some more clues as to where things are headed next. Gamblers can formulate a thesis and place some bets, but prudent speculation requires that there be more evidence before making substantive moves.
My game plan is to continue to hold high levels of cash and to be very selective in looking for new positives in individual stocks. I'm not seeing many setups right now, but this flat action is helpful in producing some potential setups.
I'm carrying some index shorts, but with very tight stops and will close them out if they don't start moving in the right direction fairly fast. I'm agnostic about short-term market direction. The indices are right in the middle of the recent trading range and there is no real edge to be found.
We will see how things develop from here, but the major challenge is the potential for a surprise news headline or a tweet from President Trump. But currently, this market is so confused it isn't even moving.