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HomeTrading NewsThe Perfect Recipe for a Volatile Market

The Perfect Recipe for a Volatile Market

I needed an escape.

Something that could take my mind away from the markets … yet satisfy my need for structure and creativity.

I found it in front of the stove.

I enjoyed cooking before the pandemic rolled in, but since last year I’ve taken it to a new level. Kitchen equipment and utensils even feature prominently on my Christmas wish list. After all, they’re much easier to find than that Xbox I was looking for.

Now, anyone who enjoys toiling in the kitchen has their favorite foods. For me, just about any Cajun dish will do.

And in the world of Cajun cooking, you quickly learn that the “holy trinity” of onion, bell pepper and celery are the foundation for many recipes.

In the same way, you need that trinity — that backbone — for a solid foundation that underpins your investment outlook.

You’re in luck. You might not get to taste any of my Cajun dishes soon, but I can give you that investment foundation…

The Key Ingredients

With the emergence of the Omicron variant, it looks like year three of the pandemic is in the cards and my cooking routine will be extended. My wife won’t complain.

It also means that this will be a headline-driven market, where news about vaccines and case counts will give stocks whiplash … just like we’ve seen over the past week. (And for that I think we’re all entitled to grumble a bit.)

But use this recipe to help cut through the noise.

This is my own “holy trinity” for navigating these trying times:

You’ve heard that old trader adage: “The trend is your friend.” That means trade in the direction of the trend; don’t swim against the tide. I like to size up the markets by comparing the major indexes against key moving averages, such as the 20- and 50-day to assess shorter time frames.
Measure participation in the market. Also referred to as breadth indicators, this can alert you to troubles lurking underneath the hood. It can also flag panic selling and capitulation, which can be great buying opportunities.
Finally, consider the mood of the investing crowd. Do conditions signal too much bullishness or fear amongst the crowd? It’s the extremes that matter here the most.

Here’s what I’m seeing right now with these indicators.

Capitalize on Fear

The stock market has been in turmoil since news of Omicron emerged last week.

The sharp pullback is having a mixed impact on trend. Large-cap indexes such as the S&P 500 are still trading above key moving averages. But small caps, as measured by the Russell 2000, are nearing correction territory with a loss of 10% from the recent high. In other words, the average stock has taken a beating.

But there’s good news…

Measures of breadth are showing signs of capitulation, while investor sentiment is swinging sharply to fear. I find that combination often signals a near-term bottom.

Of course, these indicators aren’t perfect. And Ted just showed you why markets have been so hard to predict.

But don’t panic and react to every headline hitting the wires … there are sure to be many. Instead, take a deep breath and objectively evaluate the situation.

That’s how my “holy trinity” keeps me on the right side of the trade (and successful in the kitchen).

Best regards,

Clint Lee
Research Analyst, The Bauman Letter

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