This 2018 stock market activity has been wild. In late January of 2018, the media reported on the stability of U.S. financial markets. Basically, the reports focused on the unwavering growth of U.S. stocks since the 2016 election. Many articles stated the markets seemed to be perpetually stable. Then about two weeks later in early February, the stock market was a much different place. The Dow experienced its largest single-day loss ever. By using an E-mini S&P 500 daily chart, we can see how price dropped over 300 points within a few days. Unquestionably, investors were hit hard. Many of the same media outlets now summarize the activity as a crash. Who would have thought such a thing would happen out of the blue at the start of a new year?
There are several theories as to why this happened. Perhaps it’s a combination of all of the following or none of the following contributed. U.S. economics is an extremely complex subject with many layers and variables.
Here’s what the experts think may be the cause:
- Concern/fears related to the Fed: high interest rates, bond yields, and inflation
- High-frequency trading algorithms that ran amok or (conspiracy) worked together to cause the fall
- Markets were on the rise for too long and it was simply a matter of time before they self-regulated
The bottom line is that we simply don’t know and we may never know. Where does this leave you as a standalone, retail trader? Well, if you’re tried to trade lately, you’ve probably noticed the increased volatility. “Increased” is an understatement. In some cases, we’ve seen the volatility quadruple what we normally consider high levels. For example, the ATR (Average True Range) can be used as a volatility indicator. We consider an ATR of four relatively high. Lately, we’ve seen the ATR approach 20. If you’re trading, your profit target or stop loss can be hit so quickly, that you don’t have time to prepare for the outcome. If you must trade, use ATM Strategies because it may not be humanly possible to react in time. A smarter approach is to practice in simulation mode, so that you can at least get a feel for the flow of the market. Many clients have been staying out entirely, and for the most part, we agree with this approach. Being a winning trader is about placing the trades and knowing when it’s too risky to bother trading.
What will happen in the 2018 stock market?
No one knows. However, we put together this video showing that 2018 may be an up year because of the January Effect. The January Effect was correct in predicting that 2017 would close higher in December than January. If the same holds true, we could be looking at a recovery in the coming days or weeks. This presents a potential winning opportunity to go long on a retracement. Yes, this is very high risk, so we understand if you want to wait until the E-mini’s volatility returns to that acceptable one to four-point range we typically see. Whatever happens, we’re in for a ride!