How Not to Get Trapped Reading Market 'Tea Leaves'
This essay was originally published in DailyWealth Trader, a daily trading advisory, and has been adapted. To learn more about this service, click here.
Nowadays, stocks are driven by the headlines...
On October 10, President Donald Trump sent stocks crashing via a Truth Social post...
It has just been learned that China has taken an extraordinarily aggressive position on Trade... [T]he United States of America will impose a Tariff of 100% on China, over and above any Tariff that they are currently paying.
Stocks had started the day strong, with the Nasdaq Composite Index hitting a new intraday record high. But the mood soured following the president's post...
The S&P 500 Index slumped 2.7% for the day. The Dow Jones Industrial Average sank 1.9%. And the Nasdaq lost 3.6%...
But Trump reversed course just as quickly. Two days later, he put out another Truth Social post...
Don't worry about China, it will all be fine! Highly respected President Xi just had a bad moment. He doesn't want Depression for his country, and neither do I. The U.S.A. wants to help China, not hurt it!
Stocks leapt higher last Monday as a result...
The initial dip and subsequent rally were both driven by folks trying to "read the tea leaves" of Trump's social media. But if you traded based on either of his posts, you multiplied your risk...
The Trouble of Timing a Headline-Driven Market
Let's say you sold on Friday morning, the moment Trump threatened to impose the fresh 100% tariffs. You may have been correct about the direction the market was heading. But that would still leave you with the decision of when to buy back in.
To lock in your outperformance, you'd have to correctly predict the correction – and the moment it ended, too. It's like flipping a coin twice...
Simply put, it's risky trying to trade on headline-driven volatility.
But you don't have to try to time the markets to gain an edge. In fact, investing legend Peter Lynch, who made 29.2% annualized for more than a decade, has a better way...
His approach: Don't try to predict the next correction at all. In a recent interview, he shared why...
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
This has been especially true in recent years...
Take the dip this spring when Trump announced the first draft of his tariff plan. The market did indeed correct... But if you were trying to time a trade in and out of the market, you had only a very brief window to get it right. Take a look...
If you predicted a sell-off in February, you were correct. But it didn't last long. A little more than five months later, the market hit a new all-time high.
Another notable example came in 2023. That year saw the most widely forecast recession of all time. But the recession never came. And stocks ripped higher instead...
Even the COVID-19 pandemic failed to produce a lengthy stock sell-off. As you can see in the chart below, the market quickly bounced back...
If you turned bearish based on any of these events, you had only a short period to get the trade right.
And in all three cases, simply holding through the volatility was much safer.
That's what Lynch means when he warns against predicting corrections. They're tough to get right. And the reward really isn't worth the risk.
So you must have a strategy beyond playing the news cycle.
Instead of trying to time the markets based on headlines or social media posts, I encourage you to manage your risk another way...
Never put on a trade or investment without first planning a stop loss. In other words, preselect a price point where you can exit your position for a small loss if you get it wrong.
It's incredibly hard to predict which news cycles will matter to the stock market. And it's even harder to guess how long they'll matter.
But by taking my advice, you won't even have to try.
Add stop losses to your tool kit today... and take risk management into your own hands.
Good investing,
Chris Igou
Further Reading
Most investors chase bargains – but history shows they're often getting it backward. Instead, the biggest gains come when prices are already breaking records. And today's highs could signal this bull market still has plenty of room to run.
Wall Street's greatest myth is that the market can't be beaten. But what started as a thought experiment in 1984 has finally been settled – thanks to an AI breakthrough giving everyday investors the same edge Wall Street has tried to keep secret.
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Shinhan Financial (SHG)... South Korean financial services
Grupo Cibest (CIB)... Colombian bank
Cencora (COR)... drug distribution
CVS Health (CVS)... drugstores and vaccines
Roivant Sciences (ROIV)... biopharmaceuticals
Belite Bio (BLTE)... biopharmaceuticals
Disc Medicine (IRON)... biopharmaceuticals
ASE Technology (ASX)... semiconductor services
InterDigital (IDCC)... tech research and development
Estée Lauder (EL)... cosmetics
Monster Beverage (MNST)... sports drinks
Ferrovial (FER)... infrastructure
National Grid (NGG)... energy delivery
Advanced Energy (AEIS)... electrical equipment
Northwestern Natural (NWN)... utility
NEW LOWS OF NOTE LAST WEEK
Par Technology (PAR)... foodservice technology
Atlas Energy Solutions (AESI)... Permian Basin supplier
Booz Allen Hamilton (BAH)... defense contractor