How to Navigate the Choppy Waters of the Stock Market

Posted On February 16, 2022 4:23 pm

Tell me if this sounds familiar?  The stock market has a very positive day on pretty strong breadth, getting the bulls all lathered up into a FOMO dip-buying spree; only to see the prior day’s gains circle down the drain the next day. 

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The way to navigate these choppy waters is to have a clear mind and well-defined trade parameters to execute in a methodical manner. 

Yesterday, we discussed whether it was hard to commit to medium, long-term views, or positions, given the Fed and Kiev’s headline risk, and the intra/interday price action.  The markets enjoyed good breadth, 80% positive on February 10 and February 15 — only to see mostly red screens, and 5-1 negative on each ensuing day. We said expanding beast will be crucial for a sustainable rally.  So far, we’re not seeing it. 

If we’re going to find a pattern amid this random walk of choppy trading, I’d say it’s; reversion rules the roost. It’s a fader’s, not a chaser’s market. I’ve already stated that the SPDR S&P 500 (SPY) range might be between $420 and $460 for the weeks leading into the March FOMC meeting. The debate’s getting heated as to whether the Fed will hike just 25 basis points or 50 bps, or would they even dare to jump into an intermittent hike. 

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Put me firmly in the camp that rate hikes will be delivered ¼ point at a time and will be limited to four moves in 2022.  There’s no way that the Fed does the 5-7 hikes some are predicting for this year?  I tell you what: Let them at least STOP buying bonds (the mortgage-backed securities at a minimum) before discussing what a true, and committed tightening cycle might mean for markets, housing, the boogie man of inflation, and the overall economy.  And yes, that little $8 trillion market of stocks. 

One of the interesting dynamics, or should I say dynamics, is that retail investors remain fairly bullish or optimistic and continue to buy the dip.  All told, January saw the strongest retail flows on record, with at-home traders adding $5.9 billion to equities in the final week of January.   They may be right, they may be wrong. 

Okay, it’s time for me to fess up as to what Options360 members have been doing during this choppy, challenging time. 

Yesterday, we closed positions in American Express (AXP) and Mosaic (MOS) for solid wins.  We also initiated bullish positions in Capital One Financial (COF); a week after we closed a similar position in the name for a 24% gain over the 4-day holding period.  We’ve been managing the Best Buy position (BBY) position that  I discussed last week with some adjustments to reduce the cost basis.  Options360 also established a Facebook (FB) iron condor on the notion it’s pretty washed out and needs a couple of weeks before any catalyst tales hold. 

Today, Options360 did something unusual, taking a trade from my Earnings360 service, and applying it to Options360. Specifically, Earnings360 closed a bullish position on the Trade Desk (TTD) for breakeven.  Blah.  But, TTD delivered solid numbers and has started to regain its footing.  I just sent an Alert to members of both Earnings360 and Options360 (and there’s a fair overlap) recommending the establishment of a new bullish position using a diagonal call spread.  Again, unfortunately, I can’t provide the trade details of the strike and expiration as it would not be fair to members. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.