During corrections, it can be difficult for those involved in financial markets to figure out what exactly to do. The media often portrays market participants in two oversimplified groups; “Investors” and “Traders”. The problem with this, is that within these groups there are market participants with many different financial goals, strategies, timeframes, etc… Yet blanket statements are constantly offered as advice to these general groups, regardless of what their individual circumstances may be.
The truth is, it’s impossible for anyone to tell “you” what to do during a market correction. Whether you’re a trader or a long term investor, hopefully you have a plan to reach your goals as a market participant and are more than prepared to handle common scenarios like this one.
That being said, I’m going to summarize below what I think certain market participants will be doing tomorrow, and as this market action continues to develop.
Day Traders: Pressing shorts through intraday lows or pullbacks into VWAP / trying longs against intraday lows with tight stops.
Swing Traders: Covering shorts partially and trailing stops. Nibbling long into potential support / waiting for bounces to re-short into.
Trend Followers: Continuing to raise cash / taking exits on long term positions (if not already out). Transitioning views from long to short and scaling into shorts.
Option Traders (Regardless of Timeframe): Selling puts / put spreads to express bullish views on stock while taking advantage of a spike in implied volatility / options premiums. Utilizing stock repair strategies for longer term positions.
New / Novice Traders: Probably struggling / losing money, but learning a lot during the process (as long as they are following a plan focused on their long-term development as a trader).
HFTs / Algorithms: Scalping, as usual, and running stops to exacerbate volatility and frustrate traders.
Long Term Investors: Going to their day job, continuing their 401k & other retirement contributions according to their long term plan, and not worrying about the day to day fluctuations of the stock market. Okay, they may call their advisor a few times, but hopefully he/she is good enough to talk them off the ledge and keep them on track with their long term plan.
The Bottom Line: Obviously I went through the exercise of generalizing market participants just as the media does, except on a slightly more granular level, but I think it’s helpful to have an understanding of the many different perspectives out there. The exact strategy, execution, and risk management will clearly be different, but I do think this is the game plan of many people heading into the week ahead. At the end of the day, there’s not right or wrong way to handle the current market environment. The important thing is that, in volatile times like this especially, you have a plan for how you’re going to approach the market to meet your financial goals, whatever they may be.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.