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How to Handle Market Volatility: 5 Steps for Investors
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September Market Volatility is Likely
In my recent commentary, I discussed how investors will likely have to deal with increased volatility. To summarize, the back half of September is historically the weakest part of the year and produces negative returns on average. Meanwhile, uncertainty looms ahead of Wednesday’s FOMC decision. Jerome Powell and the Federal Reserve will cut rates for the first since 2020. However, the market’s expectations are relatively split between whether Powell will cut interest rates by 25 or 50 bps.
'Triple Witching' Day is Upon Us Friday
Further, after waiting several months for a change to a “dovish” Fed policy, typical market psychology might mean that the Fed rate cuts are a classic “Sell the news event.” Finally, triple-witching, the phenomenon where stock options, stock index futures, and stock index options expire on the same day occurs Friday.
Triple witching often induces short-term volatility because traders and investors are forced to make decisions about expiring positions.
How to Handle Known Market Volatility Events
Most investors and traders’ profit when stocks are steadily trending higher with low volatility. However, how each individual handles volatility separates the professionals from the amateurs on Wall Street is. Below are five ways to prepare for market volatility:
1. Raise Cash
The old Wall Street adage “Cash is king” is paramount during volatile markets. Investors don’t need to be fully in cash, but it makes sense to get off margin ahead of volatile events. A perfect metaphor for cash and markets is hamburgers and the degree of cooking. If you undercook a burger, you can always throw it back on the grill and cook it longer. Conversely, if you overcook a burger, there’s no saving it.
Cash and portfolio management are the same. If you have cash on hand during volatile market environments, you give yourself flexibility and are empowered to take advantage of new opportunities with your cash on hand. The degree of cash will vary based on each individual’s investing framework, but it’s important for aggressive, short-term traders to remember that they can always buy positions back when the dust settles.
2. Position Size is Critical
Savvy investors have a “risk-first” mindset. In other words, instead of thinking, “How much can I make on this trade?” investors should instead think, “How much will I lose if this trade goes against me?” Position sizing is akin to a volume dial on a trader’s emotions. Smaller position sizing allows investors to think clearer and avoid knee-jerk decisions. It’s also important to remember that if the S&P 500 Index ETF ((SPY - Free Report) ) or Nasdaq 100 ETF ((QQQ - Free Report) ) moves 1% in a day, individual high beta stocks like Nvidia ((NVDA - Free Report) ),Palantir ((PLTR - Free Report) ), and Tesla ((TSLA - Free Report) ) will likely move 3-4x that.
3. Let the Dust Settle
Unlike poker there is no ante (mandatory bet) that investors must place to watch the market. Patience and the ability to let the smoke clear are superpowers.
4. Plot Key Price Levels
Rather than reacting in real-time, prepare ahead of time by plotting important support and resistance levels. It’s critical that investors conduct this exercise outside of market hours so that they are not swayed by the intraday price noise.
5. Know your Time Frame / Implications
A long-term investor is likely to do less during volatile markets, while a short-term trader may be more active. In either case, knowing your time frame in advance stops you from making emotional decisions.
Bottom Line
With FOMC, seasonality, and triple-witching ahead, the second half of September is likely to be volatile. Understanding how to navigate volatile markets is integral to investing success.
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How to Handle Market Volatility: 5 Steps for Investors
September Market Volatility is Likely
In my recent commentary, I discussed how investors will likely have to deal with increased volatility. To summarize, the back half of September is historically the weakest part of the year and produces negative returns on average. Meanwhile, uncertainty looms ahead of Wednesday’s FOMC decision. Jerome Powell and the Federal Reserve will cut rates for the first since 2020. However, the market’s expectations are relatively split between whether Powell will cut interest rates by 25 or 50 bps.
'Triple Witching' Day is Upon Us Friday
Further, after waiting several months for a change to a “dovish” Fed policy, typical market psychology might mean that the Fed rate cuts are a classic “Sell the news event.” Finally, triple-witching, the phenomenon where stock options, stock index futures, and stock index options expire on the same day occurs Friday.
Triple witching often induces short-term volatility because traders and investors are forced to make decisions about expiring positions.
How to Handle Known Market Volatility Events
Most investors and traders’ profit when stocks are steadily trending higher with low volatility. However, how each individual handles volatility separates the professionals from the amateurs on Wall Street is. Below are five ways to prepare for market volatility:
1. Raise Cash
The old Wall Street adage “Cash is king” is paramount during volatile markets. Investors don’t need to be fully in cash, but it makes sense to get off margin ahead of volatile events. A perfect metaphor for cash and markets is hamburgers and the degree of cooking. If you undercook a burger, you can always throw it back on the grill and cook it longer. Conversely, if you overcook a burger, there’s no saving it.
Cash and portfolio management are the same. If you have cash on hand during volatile market environments, you give yourself flexibility and are empowered to take advantage of new opportunities with your cash on hand. The degree of cash will vary based on each individual’s investing framework, but it’s important for aggressive, short-term traders to remember that they can always buy positions back when the dust settles.
2. Position Size is Critical
Savvy investors have a “risk-first” mindset. In other words, instead of thinking, “How much can I make on this trade?” investors should instead think, “How much will I lose if this trade goes against me?” Position sizing is akin to a volume dial on a trader’s emotions. Smaller position sizing allows investors to think clearer and avoid knee-jerk decisions. It’s also important to remember that if the S&P 500 Index ETF ((SPY - Free Report) ) or Nasdaq 100 ETF ((QQQ - Free Report) ) moves 1% in a day, individual high beta stocks like Nvidia ((NVDA - Free Report) ), Palantir ((PLTR - Free Report) ), and Tesla ((TSLA - Free Report) ) will likely move 3-4x that.
3. Let the Dust Settle
Unlike poker there is no ante (mandatory bet) that investors must place to watch the market. Patience and the ability to let the smoke clear are superpowers.
4. Plot Key Price Levels
Rather than reacting in real-time, prepare ahead of time by plotting important support and resistance levels. It’s critical that investors conduct this exercise outside of market hours so that they are not swayed by the intraday price noise.
5. Know your Time Frame / Implications
A long-term investor is likely to do less during volatile markets, while a short-term trader may be more active. In either case, knowing your time frame in advance stops you from making emotional decisions.
Bottom Line
With FOMC, seasonality, and triple-witching ahead, the second half of September is likely to be volatile. Understanding how to navigate volatile markets is integral to investing success.