Last month, I discussed how, based on my extensive post-analysis of my trading career, sideways, choppy markets were the most detrimental to my returns. Choppy markets tend to lead investors to second guess themselves, suffer “death by a thousand cuts,” and become frustrated. Jesse Livermore, who amassed a huge fortune shorting equities markets during the Great Depression crash of 1929, warned of trendless markets by saying, “There is a time to go long, a time to go short, and a time to go fishing.”

The topic of choppy markets is especially relevant because equities are currently in such an environment. In fact, understanding market conditions is far more important than stock selection. After all, 75% of a stock’s movement can be traced back to the general market’s conditions. Furthermore, Wall Street is rarely obvious, and stealth back-and-forth markets are the most dangerous. As the old Wall Street adage goes, “If they don’t scare you out, they’ll wear you out.” To survive in the long term, investors must learn to recognize choppy markets ahead of time, survive them, and thrive after the see-saw conditions subside.

How to Recognize the Chop

Clue #1: Stuck Between MAs

The simplest method to recognize a choppy market is to use the naked eye. If the major indices like the Nasdaq 100 ETF (QQQ), S&P 500 Index ETF (SPY), and Russell 2000 Index (IWM) are stuck between their 50-day moving average and 200-day moving average, it’s a good clue that markets are in a sideways phase. Also, if the 50-day moving average flattens, it’s another sign that stock prices are not trending.

Image Source: TradingView

Clue #2: Portfolio Progress

If your portfolio’s equity curve is trending upward but is now moving back-and-forth regularly, its worth paying attention to. Listen to the market’s clues!

Survive the Chop

There are three ways investors can survive a sideways market:

Play the Ranges

Active traders can buy weakness and sell strength. However, this method is more difficult than it may seem on the surface,

Trade Smaller or Not at All

“Unlike poker, there is no “anti” for investors. Savvy investors should sit on their hands and wait for the next clear trend to emerge rather than trying to swim upstream against a tough market.

Find Non-Correlated Trades

The job of the active investor is not to pile into positions blindly but instead look for bull markets. If U.S. markets are choppy, foreign markets may be a better play (and are not correlated). For instance, Chinese ADRs like Alibaba (BABA), JD.com (JD), and PDD Holdings (PDD) are each up more than 5% for the week with the S&P 500 Index lower. Another option is to transition into up trending commodities like the Silver ETF (SLV) or Gold ETF (GLD).

Prepare for the Next Uptrend

The best way to prepare for the next uptrend is to look for the 50-day moving average to turn upward, for stocks to regain the 50-day MA, and watch for relative strength (that is, stocks holding up better than the general market.)

Bottom Line

Choppy markets can be challenging to navigate. However, understanding and identifying market conditions in real-time can help investors survive and thrive in the long term.

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