Why It’s Time to Shift From Passive to Active Investing
Last week, I suggested that stocks remain in a precarious and choppy trading range and that “it is time for investors to focus on risk management rather than reward chasing.”
The S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) last week held a crucial technical juncture as support once more and a further bounce from here is indeed possible. However, some of the more successful hedge funds and traders I deal with are now operating through the lens of looking for ‘lower highs’ and to ‘sell the rip’ as opposed to hoping for new sustainable highs in the indices anytime soon.
From a money management perspective, I feel that the indexing or passive investing crowd has become too crowded just as indices are running into some hot water. Stocks have been trading in a very choppy range with little to no memory from day-to-day as the focus seems to be on headline risk. This type of environment, particularly if we are in a phase transition period from bullish to neutral in terms of stock market directionality, will favor the active management crowd and frustrate passive investors, at least for some time.
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Late last week, we entered earnings season for the first quarter and this could now shift focus back to more fundamental news flow from corporations.
So far, the SPY ETF is still trading in a multi-week sideways range with support around $255 and resistance around $267. Considering that on the weekly chart below, the SPY ETF is now bouncing off the lower end of the channel, traders could make a bet here to see the SPY rally back higher into the mid-to-high $270’s before finding another potential lower high.
The best part about this trade setup is the very clearly defined stop loss level, any meaningful bearish reversal and at very last resort a push below $255 would be a stop-loss trigger.
Market participants with less immediate gratification needs could look to simply sell or short into a next confirmed lower high in the SPY ETF.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
One part of the market that over the past week and a half has showed notable relative strength is energy stocks as represented by the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) and oil as represented by the United States Oil Fund LP (ETF) (NYSEARCA:USO).
On the top half of the multi-year weekly chart note that the USO last week broke out of a year-to-date trading range to the upside on a weekly closing basis last week. In the bottom half of the chart note the continued relative strength that oil, i.e., the USO ETF is showing relative to stocks, i.e., the SPY ETF. Given the most recent geopolitical flare-up this trend could continue and push the USO ETF well into the $14’s as a next upside target. Any major bearish reversal would be a stop loss signal.
There are various strategies to take advantage of this current trading environment. On Tuesday, April 17, I will discuss my favorite such strategy in a special webinar for Investorplace readers; Using Implied Volatility for Steady Income. Register here.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
In summary, this choppy and likely sideways movement within a wide trading range should favor active management as opposed to passive investing. Buy the dip, but more importantly look to sell the rip.
Check out Serge Berger’s Trade of the Day for April 16.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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