How to Trade A Choppy Summer Market
You can’t trust summertime trading. But in just a few short weeks, you could be back on track and booking consistent gains.
Right now, the market is trying to fool you. It lures you into buying with every thrust higher, only to pull your trades into the red as soon as your confidence is earned.
I know how difficult it can be to try and get your bearings in a choppy market. The deck is stacked against you. One day Europe is saved, the next it’s certain to fail in spectacular fashion. On Monday, the bottom falls out of the market. By Wednesday, the major indexes have rallied 2% higher. It’s anything but certain what stocks will do next…
But this type of action isn’t permanent. And if the past two summers are any indication, we could see a much friendlier market as early as September 1st.
Remember, I told you yesterday how important it is to keep the daily moves of the market in perspective. What matters, or course, is the overall trend. A couple of days of up or down action during the summer months does little to determine where the market will be in the coming months.
Summertime trading has lately been characterized by lower volume and a greater number of false moves higher and lower. You can turn to this 3-year chart of the S&P 500 to see just how tricky July and August have been for investors:
In 2010, the market began its correction in early April. And after a July rally off of June lows, it looked as if the market was headed sharply lower again.
However, once the calendar flipped to September, stocks regained their footing and embarked on a powerful rally lasting more than 6 months.
In 2011, a much sharper correction waited until early July to announce itself. It looked like August mark would mark the correction’s lows. But ultimately, the market did not officially bottom until first trading session in October.
In each case, the market presented investors with choppy, trendless action loaded with fake moves. While I can’t say for certain what the month of August will bring this year, I do recommend you keep your head on a swivel.
Here’s what you need to do until the fall trading session begins in earnest:
1. Don’t jump on overextended stocks or chase breakouts. Pinpoint your entries and only take what the market gives you.
2. Take care of your investment capital. Don’t overtrade. Don’t try to milk winners for an extra couple of cents. Book the profits and move on.
3. Respect your stop losses. Don’t chalk up a break of support to whipsaw action, even if the market is having a choppy week.
If you remain disciplined and alert, you should have no problem surviving August—and you’ll be better prepared to tackle a (hopefully) healthier market this fall.