U.S. large-cap stocks last week as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) closed off the month of February in red, thus breaking a near-unprecedented monthly streak of green. Equally important however is to note that while February registered as a down month, stocks for the most part closed well off their intramonth lows. In short, things have been choppy and I expect this type of trading to continue for some time.
The potential steel and aluminum tariffs expected to be announced this week by the Trump administration could lead to further choppiness in stocks. For active traders and investors in my eye and what I have been telling my coaching and clubhouse clients is to take a step back from the market, trade less and in smaller size while widening stop losses somewhat.
One of the easiest ways to lose money and frustrate yourself in the markets is by trading choppy markets. Additionally, with bond yields on the rise cash is increasingly coming back as an asset class. One does not have to be fully invested at all times. Often times if helps to take a step back from the fray to clear the head and regain perspective.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
To wit, the weekly chart (weekly candlesticks) shows that although stocks lifted off their February highs, the SPY ETF last week closed where it traded in early February, which is to say that directionally no progress was made in this choppy environment over the past few weeks.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
One part of the stock market that continues to show both absolute and relative strength is the PowerShares QQQ Trust (ETF) (NASDAQ:QQQ). Large-capitalization technology names have allowed the QQQ etf to early last week just about revisit their January highs.
As a result this part of the market has also showed relative strength versus the SPY ETF(blue line at bottom of chart). The question for this index too, however, is whether it can break out higher of its already steep 2017 up-trend. In my eye there is a low probability of such a sustained breakout, which is to say that while large cap tech names can continue to work higher, the rate of change on the upside is most likely limited to within the up-trending channel I drew on the daily chart.
One way to generate income in a choppy market environment with elevated volatility is by applying a specific high-probability options strategy. I will explain this income strategy in detail this Tuesday in a special webinar for InvestorPlace readers only. You can register here for this free webinar.
Until these markets become directionally easier to trade, in my eye it is best to take a step back for the time being. Active investors and traders can look to “trade the range” by nibbling on the long side near the lower end of the trading range while taking profits at the upper end of the range.
Check out Serge Berger’s Trade of the Day for March 5.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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