How to Navigate Changing Market Conditions - TheStreet.com

The easiest way to make big money in the stock market is to aggressively ride up-trends. Everyone is a genius in a bull market. When the market is steadily trending upward the best course of action is to buy the best stocks you can find and ride them as long as possible.

However, it is how you navigate the market when conditions change that will determine your relative performance. The best performing hedge funds produce their best relative performance when the market weakens or is undergoing a change in character.

I often preach that if you stay focused on keeping your accounts as close to highs as possible you will produce superior returns but that means you must be adept at navigating the market when the uptrend ends and conditions become more challenging.

Here are the key steps to know about when dealing with a poor market.

1. Move fast and then be patient.

Inertia is what tends to lead to the biggest losses. Folks that were wiped out after the bubble popped in 2000 mostly just sat there and did nothing as conditions changed. Typically, it is better to err on the side of doing something rather than nothing when the market starts to shift. In recent years I have often taken premature defensive action and paid a price for it but my biggest losses have always come when my defense is weak. It is better to move fast and then wait to see what develops. Once you have made some moves then you can be patient to see what to do next.

2. Momentum works differently

Markets go down much differently than they go up. Downside tends to occur quickly and resolve itself faster. Bottoms tend to be a point while tops may take a long time to develop. It is necessary to be a bit more anticipatory in a bad market because the moves can come much faster.

3. Stocks tend to be more correlated when the market is bad

In poor markets stocks have a greater tendency to move in tandem. When selling takes hold, big baskets of stocks are sold together and without regard to individual merits. Buying in good markets is also correlated but not to the same degree. The good news is that this correlated selling will lead to some great opportunities when good stocks are sold along with the bad. When the bottom eventually comes the recovery in the good names will provide outsized gains.

4. Counter-trend trading

If you look at the top performing days in the indices almost all of them have occurred in poor markets. The biggest bounces occur in the worst markets. Market players simply aren't prepared for these countertrend moves so when they start they tend to gain substantial momentum. These bounces provide great opportunities for traders that are are able to navigate quickly

5. Bottoms form much faster than tops

Bottoms form faster than tops, which means it is necessary to be anticipatory. Slowly averaging in can work well in downtrends but timing and risk management is paramount. You have to have a plan in place if you are going to buy stocks that are caught in a market downtrend.

6. The goal isn't to buy the exact low

It is important to not be too hung up on timing a precise turning point. The key to making money is to catch a sustained move in a stock. If you work too hard trying to identify a bottom you are engaged in a futile process and will often miss the bigger picture. Ignore the market timing experts and stay focused on price action as your primary clue.

7. Protect capital above all else.

There is no better market indicator than your profit and loss statement. If you are losing money don't just sit there. Take action and try to keep your accounts as close to highs as possible. Forget how great this or that stock might be. That is secondary to your precious capital. With capital you are always in the game and ready for the next trade.

The most important thing to do when market conditions change is to change your thinking and embrace the fact that it is no longer a bull market. Don't fight what is going on in front of your face. If you navigate the tough markets well you will produce superior returns.

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https://realmoney.thestreet.com/investing/how-to-navigate-changing-market-conditions-14956042

2019-05-11 14:00:00Z
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