What can you control?

It is turbulent in international marketplaces nowadays, with large fluctuations in both stocks, fixed income securities, commodities, and currencies. For example, the leading US equities index, the S&P 500, has had its weakest start to the year since 1932. At the end of this week, the index was down -18% year to date, while the more technology-heavy NASDAQ 100 has fallen -27.5%. The most growth-driven stocks that were very popular until the beginning of 2021 have been punished even harder. Many are down 70-90%.

In raw materials, the picture is mixed. The oil stays close to record levels, and the same applies to some agricultural raw materials. Both can at least partly be linked to the situation in Ukraine. However, many metals have fallen back significantly in the last six months, and both copper, aluminum, gold, and silver are now trading below their 200-day moving average.

In the bond market, this year's sharp rise in interest rates has led to sharp price declines. The US exchange-traded fund TLT, which holds 20-year US government bonds, is down -20% so far this year. It has thus helped little to keep a mixed portfolio of fixed income and equity securities in the current situation. Both are down sharply.

On top of all this, the Oslo Stock Exchange has held up well. This is due to a lucky sector composition, where oil stocks in particular weigh heavily in the index. However, one must not forget that it was not until October 2021 that Equinor established itself above the price peak from 2006. After 15 years of desert hiking, the oil producer now has its place in the sun. In addition, the winning list is characterized by companies within shipping and oil service. Sectors that have both been characterized by series upon series of restructurings and capital replenishment over the past two decades. Not exactly a stable place to store valuables. Growth and technology shares have also been beaten on our domestic stock exchange. The Oslo Stock Exchange's technology index is actually significantly down since the turn of the year.

 

A time for tacticians

After several years of upturn, these trends have been broken in most markets, and we are seeing greater turbulence and downward trends. Under such conditions, one can to a small extent sit back in the chair and let time work for the investment portfolio. So what do you do? Is there a roadmap for how to proceed? Yes, there are both overarching considerations and tips for concrete action. What is best for the individual, however, depends on a number of factors, such as starting point, time horizon, willingness to take risks, competence, access to tools and willingness to use time. As always, it is important to focus on what you can control, and to use methods that suit your style.

 

Strategy vs. tactics

In general, one can say that the investment strategy is the long lines of how to proceed as an investor, while tactics describe a more short-term pattern of action. The most common investment strategy for most people is monthly savings in various funds. You are happy to continue with this as long as you are at work, and money is invested regardless of good and bad times. When you retire, this is reversed, and capital is taken out. If you are such a player, bad periods in the market could be an advantage, provided that they do not occur towards the end of the savings period. In bear markets, you may even want to increase your monthly savings, as you get more shares for your money.

However, for investors who already have significant wealth invested in the market, such periods are difficult. Diversification works poorly when "everything" is expensive, and prices fall in shares, bonds and real estate. Some investors have rules to reduce exposure when leading market indices fall below e.g. 100 or 200 day moving average. Then you can be a buyer when the decline is coming to an end, which is made visible by the fact that the indices sooner or later stop falling.

For those with time and desire to be active in the market, bear markets can offer interesting opportunities. However, one must operate according to a different set of rules than what applies in bull markets and be a good tactician. The following points are important:

 

Timing

In bull markets, it is less dangerous to miss a day or week when you buy an OK stock. Time works for you, and the uptrend will usually lift good stocks further. In bear markets, stocks can fall much more than you think. A stock that has fallen 90% can be said to be a stock that has first fallen 80%, and then halved. Many such stocks never come up again, or it takes many years. The solution lies in being picky about when and what you buy. Study the behavior of the stock, the sector, and the market carefully. Look for signs of relative strength, and / or that it is receiving at established support levels. A gradual entry combined with a predefined stop-loss can allow you to capitalize on some of the powerful rallies that often occur in bear markets. Always use stop-loss. Rather go on several times in the same stock.

 

Fluctuations

In troubled markets, there are much larger fluctuations (volatility) than one is used to. Daily movements 2-3 times larger than usual can occur frequently. The same applies to abrupt and unpredictable changes of direction. The trend in a market index can be firm and nice in the morning, but down 3-5% later the same day often without any concrete news. Under such conditions, one must have both hands on the steering wheel. My tip is to focus on the indices or the leaders (the largest and most liquid) stocks in each sector, use gradual entry, have stops on all positions and (as mentioned above) be prepared to try your entry several times. In addition, you may want to have smaller positions than you usually take so as not to increase the risk.

 

Scenario-based trading plan

Something I myself focus on these days is to have a scenario-based trading plan. One can e.g. have a basic idea (scenario A) that an index, commodity, stock, or sector is ripe for an upswing. The assumption is well-founded and based on all available information at the time. There are probably many in the market who see the same thing as you and want to try. Still, of course, it can go the other way. The key to turning defeat into success is to be able to have a scenario B that is more comprehensive than just a stop-loss that takes you out of position. Turning down again and that the level does not hold is information you can potentially profit from by initiating a short position.

 

Perhaps something I follow has had several days of falls, reached a technical support level, shown signs of stabilization, and is starting to bounce. A purchase seems interesting, and I do. If it works well, I increase the record, and move the stop up to the area around the input value. If it goes then you have not lost anything in trying. This is often done on several securities at the same time, which are assumed to fluctuate in line with scenario A. If stop after stop starts to go, however, this is valuable information. If you have the plan ready, the failure of technical support and turning in momentum can give you a good start in a short. But it is not easy to make such a turn if you have not thought it through beforehand.

 

Disclaimer: After many years in the brokerage business, I wrote the book "Paleo Trading: How to trade like a Hunter-Gatherer" in 2021 and launched a hedge fund that trades on the same principles. Vontobel asked if I would write any posts for their blog, similar to what traders and managers do in other countries. I want to emphasize that none of what I write on this blog is to be regarded as personal advice or concrete encouragement to take positions. Everyone must be responsible for their own decisions and familiarize themselves well with the products they use.