Market Upheavals: Do You Stay In or Out?

The following is a guest blog post:

The financial markets have got off to a bad start in 2016 with the value of the major stock indices and commodities taking a free fall. But is it entirely a bad start? Yes, it may be bad for those who are long on these assets but for short sellers, 2016 could not have started on a better note.

Whenever there are market upheavals, there is the tendency for most retail traders to simply stay out and in their words, “wait for markets to stabilize”. This is not really a good perception to hold on to. Historically speaking, the financial markets have always had periods when they go haywire, and those on the right side of the equation have always come out big winners. Money is made when markets are volatile and there are many ways to play volatile markets.

Take for instance the correlation between the US Dollar, commodity currencies, oil and other commodity assets. The stronger dollar, coming off the December rate hike, has hammered the value of the emerging market currencies which are commodity based. So with dollar strength, there are many possibilities to trade.

 

2016-01-19-001215_1600x900_scrot
 

To be able to trade this period of volatility profitably, you need access to a news source and sound analysis. You can follow Trade 24 on crunchbase to get an overview of happenings in the financial markets and know where the action is taking place.

 

How to Trade Super-Volatile Markets

It must first be emphasized that trading volatile markets is risky business and is not for everybody. Indeed, it should not be attempted by those who are new to the market and those lacking the required experience. If you understand how to interpret the news and the charts and you have some experience, then you can attempt it.

 

a) Risk management is the hallmark of every trading endeavour which is successful. What does risk management do? It ensures that the trader’s account survives to trade another day even when there have been losses. So the trader should use low risk as much as possible.

 

b) Look for correlations. Instead of trading copper, trade the AUDUSD for instance. Australia produces a lot of copper, most of which goes to China. Let’s face it; economic news from China makes up a large component of what is driving the present market upheaval. So by trading correlated assets, you may avoid trading the very volatile assets directly and trade the more manageable correlations. You can easily do this on brokerages like Trade-24 that perform investment management and financial services.

 

c) Before you trade, you need to look at the long term outlook for the asset. To do this, use a daily chart. This will show you what the asset has been doing in the past few months to a year, and can help you make some projections as to what the asset will do. Keeping a long term outlook helps the trader wade through the market intraday noise and press towards a more definitive target.

Here is an illustration of how a typical trade may look like, and we will use an asset that has experienced some market volatility to showcase this.

 

Scenario

Ever since the Fed Reserve started singing the song of a possible rate hike, the USD had been gaining over the ZAR. When the rate hike was eventually announced, the USDZAR hit unprecedented levels.

 

2016-01-19-001757_1600x900_scrot2
 

Raised US interest rates would lead to a stronger dollar and weaker commodity prices. Therefore, we would expect the USD to gain strength over currencies such as the South African Rand (ZAR), an exotic currency commonly traded on the forex market. So we expect the USDZAR medium term outlook to be bullish.

So a discerning trader would look for periods when it would be safe to buy the USDZAR. A good measure of support and resistance would be the Fibonacci retracement levels. As we can see from the hourly chart below, there were at least three of such opportunities on the chart.

 

2016-01-19-001939_1600x900_scrot3
 

With low risk and being able to time a bounce of price off the supporting Fibo levels, the trader can ride the storm of the price move like a surfer, knowing that it would more likely than not, move in the direction of the main trend.

Markets may be volatile, but there will always be an opportunity to make some good money. Remember to keep an eye on China; the last may not have been heard from that economy yet.

15 thoughts on “Market Upheavals: Do You Stay In or Out?

  1. That’s an interesting way of trading in a bear market. I’ve hear of gold, silver, palladium, and utilities as hedges against the market but never the ZAR. My only problem is South Africa isn’t very stable.

    I think a better trade would be a 3x bear financial ETF, FAZ. When markets go down the first to get punish are small caps in the russell 1000. With the horrible big bank earnings + fear of interest rate I think smaller banks will get punish this earning season.

    but that is an interesting way to trade

    • Hi TBDI,

      It’s not a trade I would feel comfortable doing. Still, it was an interesting read about dealing with the current decline and turmoil in the markets. I also stay away from leveraged ETFs. Call me a plain vanilla investor, I just do not feel comfortable with these ‘exotics.’ Thank you for stopping by and sharing your thoughts.

  2. Staying in or out depends whether you have cash to invest. It could be a good time, but indexes likely to slide further. Lack of appetite for commodities is indication of no demands for goods. Hence there is slide.
    I would go in today, if I have spare cash. It is risky, but we should not complain when we consume burgers and these are getting cheaper.
    Financial Independence recently posted…Real life portfolio performance 2015 and retrospectiveMy Profile

    • Hi FI,

      While it’s true that having a cash position does play a part in whether or not you are in or out of the market it isn’t the only factor. Many have been sitting on a pile of cash for months staying out because of a fear of a potential bear market. It’s true that commodities across the board are all showing a lack of demand which is manifesting itself in low prices which in turn is dragging the market and seemingly every sector along. Thank you for commenting.

  3. It’s only easy to buy at support after the fact. In other words, at any of the circled areas on the chart, a downward move could have occurred after the event that meant the market wasn’t at support. Same is true for any type of technical analysis; none of them are perfect. Seriously, if technical analysis was perfect, the technicians would be rich. And they wouldn’t be sharing their methods, right?

    Buying stock in great companies, that are increasing revenue, earnings, and dividends every year, particularly when they are selling at low valuations, has historically been a successful way to invest. I have open orders to add shares of KMB ($101.30) and NKE ($52.35), for example, at levels we haven’t seen for a couple of years. I will be thrilled if the orders are executed regardless of what the market does. The flash crash of August did indeed teach this old dog a new trick.

    • Hi KeithX,

      Your comment highlights a point I have always believed in… charting, technical analysis, much like the weather forecast is only correct after the fact. This is why I do not look at charts or time the markets even when the most prominent of the financial talking heads claim the market is headed for a free fall or a sharp rally. The truth is, no one knows. We both share similar investing styles looking at the business as a whole first and largely ignoring charts, predictions and other financial forecasts. I haven’t looked at my KMB in a long time. I guess these days we’re getting many fresh opportunities to invest in a lot of great companies. As always, I appreciate your comment.

    • Hi DGI,

      I am a long term dividend growth investor and have held the stocks in my current portfolio between one to eight years. Actually, almost all my holdings are about eight years old except my Canadian banks TD, BNS and RY and REITs HCP, HCN VTR, CCP and ADM and DOV. The rest are all long time holdings. I am not a market timer at all. In fact, I am continuing to make monthly buys as I have since 2007 no matter the market conditions. This was a guest blog post submitted to DivHut. The line, “The following is a guest blog post:” appears at the very top. I want to be clear that I am a long term dividend growth investor that has not sold one stock in the last eight years. You can look at my current portfolio holdings to see my gains and losses. Thank you for your comment.

    • Hi Tristan,

      Like you, I rarely sell and stay in the market no matter where it stands. In fact, since I became a dedicated dividend growth investor I have not sold one share in anything since 2007. I just make my monthly buys in all market, economic and currency conditions. As you stated, 2009 was one of the best times to buy or add to existing positions. Of course, during those dark hours it can be difficult to make your buys. Thank you for your comment.

    • Hi SMT,

      I agree that this article is a bit short sighted which is why I don’t subscribe to the premise. I stay in the market even during extreme volatility and major declines. I realize that everything is cyclical and a strong dollar today will be a weaker dollar tomorrow. This holds true for almost any asset class in the short term. Still, it was an interesting point from the authors’ perspective. I appreciate your comment.

  4. Reserve Bank of India(RBI) Governor Raghuram Rajan as expected maintained status quo on key rates in his monetary policy review and kept repo rate unchanged at 6.50 per cent, reverse repo at 6 per cent, cash reserve ratio or CRR unchanged at 4 per cent

    • Hi ST,

      I think worldwide interest rates will remain very, very low for some time. Looks like the whole world is in a funk these days.

Leave a Comment

CommentLuv badge