Its been more than a decade since the stock market underwent as difficult a period as is now unfolding, which leaves newer investors extra vulnerable, according to Real Money Columnist James 'Rev Shark' Deporre.
“Anyone that started trading since the 2008-2009 recession and bear market is likely dealing with the most difficult market environment they have ever seen,” Deporre wrote recently on Real Money. “A stealth bear market has been operating in many stocks since February 2021, and now it’s spreading to the broader market and creating elevated volatility.”
According to Rev Shark, there are many different styles and approaches in dealing with challenging markets, but if you aren't clear about what you plan to do, that leads to emotional and suboptimal decisions.
“My style is a combination of stock-picking, momentum and technical trading, and it doesn’t work very well in a current market environment that’s driven primarily by macro flows, rotational action and computer algorithms,” he said.
To help out, here's a look at Rev Shark’s current seven-point strategy for investing in a toxic market
1. Stay highly reactive and do not spend much time trying to predict what might happen next.
Many people spend time and energy complaining about the horrible market, which may provide some emotional relief, but it is not productive. The market always has and always will go through cycles. Miserable market action is just the nature of the market beast at times. The future will take care of itself. Focus on managing what is happening today, which is the only thing that you can control.
2. Maintain a high level of cash.
There is no benefit to building big positions in a poor market. When there is a clear turn and some sustained upside, there will be plenty of time to put money to work. Traders often fear that if they don't put money to work into the teeth of a decline, they will miss out. That just isn't the case. When a bull market environment develops, it will last weeks or months.
3. Keep stops tight, and don't let bad positions grow too big.
If a trade doesn't work, then take the loss and try again. It will be frustrating to keep taking losses on trades, but if they are contained, then it is just the price of insurance. You do not want to keep adding to losing positions in a poor market. Wait for strength, and then be aggressive. Recent lows are often good stop-out points.
4. Fundamentals will not protect you.
One of the biggest frustrations in this sort of action is that great stock-picking does not matter. As we have seen, computer algorithms will sell everything in a sector regardless of its merits. Eventually, these stocks will find some buyers, but there is no way to know when. I keep positions in some favorites and then look to add to them when they have better technical action.
5. Focus on individual stocks and not the indexes for timing purposes.
There are thousands of folks looking at index charts and trying to predict what levels will hold or not hold. Even if they are right, it doesn't necessarily apply to the stocks you might be trading. Folks that have focused on the indexes have completely missed the bear market in much of the market, and they will likely miss the bull market when many of these stocks start to exhibit better technical action.
6. Look for relative strength.
The key tipoff that a turn is coming in an individual stock is when it starts acting stronger than other stocks. When the shift comes, the accumulation will become evident, and it will last more than a few days. The stocks that will lead to better market conditions will become apparent at an early stage. Watch the price action and look for relative strength.
7. Don't get discouraged.
Bear markets take an emotional toll on market participants. It isn't just the losses but the duration of the action. It is easy to feel that this tough action will never end and that we will never make money again. I can tell you with complete confidence that the cycle will turn, and you'll be back and wonder why things were so miserable.
