Despite significant volatility in the market over the last year, stock prices have basically gone nowhere. And prospects for next year look none too rosy as the economy sags.
So how does one profit in this market? It's not easy, and buy-and-hold is far from a compelling answer. But there is one approach that may help investors lock in gains from the sideways market, and it could very well involve stocks you already own.
Though systemic economic troubles will likely keep stocks from rallying over the next several quarters, equities will nonetheless continue to move actively within certain price ranges, says Mark Scheffler, a senior portfolio manager at Appleton Group Wealth Management. And trading within that range is how investors can make money, he says.
When stocks are range-bound for several months, Scheffler has observed a whipsaw effect as they reach their short-term peaks or troughs.
"At these inflection points," he says, "stocks tend to be more reactive to fundamental company or broad economic news. And this sensitivity tends to be noticeable when the market is broadly in a flat, trendless way."
This makes capturing a 10% or 12% gain over the short term a reasonable possibility. But it also means investors will have to adjust the way they invest-and adjust price targets to match current reality.
To help ensure this approach works, advisors need to first identify solid, profitable companies whose stocks have demonstrated clear trading patterns over the past several months. As they break lower, consider buying and then selling into a modest rebound. A stock trading at $20 needs only to inch up to $22 for a 10% gain.
Phil Roth, a technical analyst at the institutional trading firm Miller Tabak, sees merit in trading within a range. He agrees that having modest, disciplined price targets can help ensure investors sell out of a position before a stock's pattern breaks. But he cautions that "the longer a stock demonstrates a cyclical pattern, the sooner it may break out of that pattern-up or down."
Roth prefers a different trading approach. He targets returns of 20% or more by recommending a stock when it breaks out of the top of its range-a standard technical trading strategy. He focuses on stocks demonstrating widening daily trading ranges as prices are trending higher on increasing volume.
To limit downside risk, he applies stop-losses at around 8% below his purchase price. So if he's right only half the time (which he is), these basic rules help him achieve attractive total returns in virtually any market.