Is Active Trading Right for This Market?

I listened to part of a CNBC interview with Leon Cooperman today. Mr. Cooperman, the former hedge fund manager, feels the market is a little ahead of its current fundamentals, and that it will take up to two years for earnings to normalize again. When asked what that meant for the market he stated his belief it will be range bound. Given the reality of our situation his view is quite possibly accurate.

If this is the case, and we are range bound for the near future, does it make sense to actively trade the market? Before we answer that let’s take a moment to determine what we mean by “actively trading” the market. This could be day-trading, swing trading, position trading for a couple weeks to a couple months, making a value trade, and taking the short side of a stock after a near term top. What I do not mean by active trading is buy something and hold on for several years, whether you are buying a “value” stock, a “momentum” stock or however you want to label a trade.

There are two sides to this argument and the side you are on depends on what kind of trader you are. On one hand, you can certainly follow the slower Warren Buffett approach and buy undervalued companies and hold on for several years. You ignore the shorter term market fluctuations. At some point, you are likely to make a decent return on your investment.

On the other hand, you can also trade stocks with more frequency. You will capture smaller gains, but you will avoid large drawdowns and your money will not be parked in a stock that spends years going nowhere before it makes its move. Neither approach is necessarily right or wrong, good or bad.

Trending Trades is geared to a somewhat more active approach. A more active approach allows you to be fallible. The reality is neither you nor I are Warren Buffett so to think we can find one or two stocks out of thousands that will give us a huge return may be a bit of wishful thinking. It is far more likely that we will choose more than our fair share of clunkers. Keeping the losses of those clunkers small and letting the good stock picks run, then locking down a profit before giving it all back is a solid approach. The answer then is, this market probably does set up well for a more active approach to trading.