How To Invest In A Choppy Stock Market
Taking profits is a tough concept for some investors. There are investors who have no qualms about selling at a 5% or 10% profit, particularly when a market is choppy. But selling only, say, 20% or a third of a full position in a stock has a different feel — particularly when a stock shows both promise and resilience when the market is challenging. Part of you says, "Why shouldn't I just hold on to the whole shooting match?"
The answer: to protect your capital. Your relationship to your money is more important than your relationship to any stock.
When the market gets dicey and you're holding a winner, do some gardening. Trim back positions to lock in some gains, but maintain the bulk of your position while carefully watching for sell signals.
A good example is 3D Systems (DDD), a leading maker of three-dimensional printers, as it slogged through a 12-month consolidation ending April 16, 2012. That's the day it broke above a 25.87 cup-base buy point in heavy trade (please see a daily chart).
Entering that correction, investors who had bought in August or September 2011 held gains in the 250% range, depending on their specific entry points. But the stock had sent a bright red sell signal in the form of an 18% loss on April 28, 2011. The heavy-volume move sliced deep below its 10-week moving average (1).
The next year, the April 2012 pattern was the first buy opportunity following that dive. Still, the situation was dicey. The market's status was "in correction." The S&P 500 pulled back, still maintaining tenuous support at its 50-day line. The Nasdaq was already losing its 50-day grip.
But 3D Systems had just introduced its Cube 3D, a $1,300 modeling unit designed for use in the home. Investors were wild about the technology's prospects.
3D jumped 10% above its buy point in two days, then held. The market followed through the next week, launching a fresh uptrend. But the status was shaky — it would shift to "uptrend under pressure" four times in the next three months. It would slip into corrections twice.
But 3D Systems climbed 74% with some fast pullbacks yet no real sell signals through the end of August. On Sept. 7, the stock dropped 5% and stabbed through its 10-day short-term moving average in heavy volume. Soon afterward, the stock split the 10-week line (2) . Investors who had watched 3D's 18% loss on April 28, 2011, knew the stock could be volatile.
This would have been a good place to trim at least part of the position. Why? Protect those respectable gains, limit how much capital you leave at risk.
The market came under pressure on Oct. 9 and went into another correction Oct. 10, as 3D was trying to climb out of its consolidation. The stock briefly cleared the base's 44.90 buy point in the second week of November, but the weak breakout didn't hold.
Investors quickly started receiving trim signals. The stock fell through its 10-day moving average with an 8% loss in heavy trade. A good time to shed another 20% of the original position. Three days later, it dropped through its 10-week line in a heavy-volume 9% loss. It was a good time to drop more shares while still keeping much of the original stake exposed.
How To Invest In A Choppy Stock Market
• A Choppy Stock Market Is Like Endless Speed Bumps
• Getting Defensive In Choppy Market Can Prevent Losses
• Lower Expectations In Choppy Markets
• A Few Lessons From 3D Systems On How To Lock In Gains
• Base-On-Base Is Subtle Strength
• In Stormy Market, Watch The RS Line
• The Ins And Outs Of Base Counting
