The Fed meeting is out of the way but the market troubles aren't. With the S&P 500 trading near lows, here's how we've stayed positive this year. Both in our outlook and our swing trading model portfolio.
Avoiding Trouble With Low Exposure
One of the best strategies for this year has been staying in cash. For SwingTrader, our average cash position for the year is around 80%.
As an example of staying out, the low on Feb. 24 was an important inflection point for the indexes (1). Going into the day our exposure on SwingTrader was at zero.
But we are always willing to increase exposure when we see signs of a turn. It's nice to have a gap of outperformance over the S&P 500 but it can quickly disappear if you stay out too long during a market recovery. That's why we are willing to go in with some pilot positions at potential reversals.
Shorting During Downtrends
What about shorting when things look so bad? We tend to short after a move up and the rally begins to fail. We put some short positions on as the S&P 500 rallied in February. But by the time the S&P 500 tested its Feb. 24 lows a couple weeks later (2), our shorts were covered. Taking profits quickly is even more important for shorting.
Even when the S&P 500 had a follow-through day the next week (3), we didn't ramp up our exposure to fully invested though the ensuing rally was strong.
The Nasdaq composite had its own follow-through day two days later (4), but it was hard to feel confident in technology stocks. Much of the strength came from the most-beaten-down stocks. If their rallies led to downside reversals at moving averages, it looked like they could be setting up more shorting opportunities.
Staying In Phase With The S&P 500
After the March 16 follow-through day, the S&P 500 got back above its 50- and 200-day moving average lines and it looked like the worst could be over as it crossed 4,600 again (5). In a lot of cases we were selling into that strength in the stocks on SwingTrader. But we struggled to find replacements. The stocks that were working looked extended. The ones that weren't looked like they needed more time.
The end result was again naturally declining exposure before the market got into trouble.
Notably, the Nasdaq composite hit its head on the 200-day line around the same time. Many of the stocks bouncing off bottoms started hitting their heads at 50-day lines. More short positions set up than long positions at that point.
Our S&P 500 Trade Falters But We Still Get Outperformance
As the S&P 500 came back to its prior lows (6), we initially looked for a bounce in what seemed to be a trading range. But then there was a bit of a washout as the S&P 500 finally breached its Feb. 24 lows (7).
With the Fed meeting on tap, we continued to stay light. We put on a SPDR S&P 500 ETF position after the market rallied (8) with Fed Chair Powell's statement that the Fed was "not actively considering" a 75-basis-point hike in the coming months.
Why act before a follow-through day? Our exposure was already very low. Adding a little exposure avoids getting left behind should the rally work.
But what if the rally doesn't work and the S&P 500 falls, like it did this week (9)? We take our lumps. In this case, our model portfolio fell 0.6% while the S&P 500 fell 3.6%. The low exposure and quick loss cutting led to even more outperformance.
So do we just stay out forever? This is where we rely on a combination of indexes and individual stocks to give us signals. With setups looking sparse and indexes at lows, our exposure remains low. But when you start seeing more setups in stocks with strong relative strength lines, that is an early tell that a rally may be in the making (check out this week's podcast on the look at leaders at market bottoms). Just as stocks can correct more than the indexes in down markets, the upside potential for stocks in up markets is where wealth is truly built.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
