More Volatility Ahead? Add This To The List Of Reasons
Things are are already pretty wild in the stock market – I think we all know that. But things could become even more volatile in the next few weeks.
I’ve detailed the reasons why I correctly predicted the recent pullback – especially in the tech sector. [See: I Called The Dip — And Now I’m Expecting More Weakness…]
I’ve also given examples of what former Fed Chairman Alan Greenspan called “irrational exuberance”.
But there’s an elephant in the room that we need to talk about. And that is the fact that there is an election coming, and stocks tend to be more volatile around presidential elections.
This is consistent with the fact that traders tend to sell when the news is filled with uncertainty. Generally, election outcomes hold a degree of uncertainty. That’s certainly the case this year.
Treating Trading Like A Game…
Another reason to expect volatility is the fact that there has been upside volatility in recent weeks.
Financial media has been filled with stories in recent weeks about how new traders have entered the market. (I’ve also covered this in some detail as well.) Some, according to the stories, are using their stimulus checks to day trade. There is no doubt that many traders are active on Robinhood, an app that makes trading feel like a video game.
These traders have only known a bull market. And their belief that markets can only go up is being challenged. The chart below shows the tech-heavy Invesco QQQ Trust (NASDAQ: QQQ), which delivered a total return of 85% since the bottom before pulling back by 10%.
For new traders, this could be the first time they experienced a 10% pullback.
For traders in individual stocks, this could be the first time they experienced a significant loss. Just consider what anyone who recently bought into Tesla (NASDAQ: TSLA) went through. That chart is below.
TSLA soared more than 600% above its March low. It gained more than 80% in three weeks from the August low. The blue line is the volume weighted average price since that August low. With the price below that level now, the average investor who bought TSLA in the past few weeks shows a loss. That could be alarming to new traders who believed TSLA was destined for higher prices.
Now, TSLA did eventually rebound. The price now sits at around $445. But I’m willing to bet that a lot of those new traders sold in panic, only to watch the stock rebound after that.
Action To Take
Add it all up, and the conclusion is pretty clear. This is why I expect to see increased volatility in the next few weeks. There are new traders who have never seen extended declines. If media reports are accurate, there are overleveraged traders and many new traders who are not well diversified.
To limit risks, I remain conservative with my trading strategy. It’s also why you need to know about my colleague Jim Fink’s “repeat” trades…
According to Jim, trading just three predictable stocks has beaten Wall Street’s top money managers for the past 8 years. And he has the stats to prove it. In fact, one subscriber is making so much money, he told us, “I no longer need a job!”
Best of all, Jim’s strategy takes just 7 minutes to complete once you’re all set up. After that, you simply watch the income roll in.