Week Ahead: Volatility is Your Friend

Week Ahead: Volatility is Your Friend

Last week, the U.S. President engaged in an increasingly bellicose war of words with an unstable dictator with nuclear capabilities, discussed the possibility of intervening militarily in Venezuela, and fired the first salvo in what could easily become a vicious trade war with China, whose help with North Korea he simultaneously sought.

Oh, and he also picked a fight with the Senate majority leader, making tax reform and/or infrastructure legislation that much harder when and if Congress gets around to it.

Then this weekend, after equivocating on the condemnation of the neo-Nazi and white supremacist groups that marched in Charlottesville, he faced so much criticism from his own party that the chances of an impeachment ratcheted up once again.

The market responded this morning: Futures are suggesting that all the major indices will open higher.

We did see a fairly large drop on Thursday, but Friday saw stabilization and the action so far today hints at resuming the upward path. That seemingly illogical reaction leads one to a logical conclusion. It is increasingly clear that traders are essentially ignoring what comes out of the chaos at the White House and focusing on a decent earnings season and the improving prospects for global growth instead.

In fact, if you detach yourself from the hysteria of the twenty-four-hour news cycle and look at what is actually happening rather than what might happen, that makes perfect sense. Q2 earnings were good, if somewhat sector specific, and the resurgence in Europe coincides with evidence that suggests that Chinese growth is not going to collapse after all. With that as a backdrop it is little wonder that each swoon is met with a wave of buying.

For retail traders and investors therefore, even those who believe that at some point the market will factor in all the uncertainty, buying on those occasional dips continues to be the best strategy. At various points, the worries about geo- and domestic politics will become more intense, so this should be a short-term strategy for now.

It is about trading, not investing, and movement is essential for successful trading, so buying the stocks that drop the furthest offers the chance of the best returns. Right now, in other words, volatility is your friend.

For example, something like Amazon (AMZN), that has lost over twelve percent in the last couple of weeks offers enough upside to make it worthwhile. Much of those losses were down to an earnings miss, but really, when have Amazon’s actual earnings mattered? The stock has been all about growth for a long time, so the revenue beat that was reported for Q2 will, with time, be far more impactful, especially as the gap was due to yet more growth oriented expenditure.

 Microsoft (MSFT)’s drop over the last couple of weeks was not as large, but in that case, it followed a spectacular earnings beat rather than a miss. As analysts begin to adjust their estimates over the next few weeks based on that information, the reversion to an upward path for the stock will accelerate, again offering the prospect of some decent, rapid gains.

Not every stock that drops is a buy, of course. The current upheaval in traditional retail and media makes those sectors unsuitable for the strategy, and sustained volatility in oil prices mean that energy stocks are reacting to their own stimuli. In most sectors, however, the periodic drops on worry about politics are quickly corrected, and while that remains the case, you should remember that the bigger the fall, the bigger the bounce, and welcome volatility.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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