A survival kit for managing stock market volatility

Tuesday, Feb 06 2018 by
A survival kit for managing stock market volatility

After a strong start to the year we’ve had a few days of downward pressure on prices that was perhaps inevitable in some ways.

Over the past two years UK shares have been flying. In fact, since the nadir of the financial crisis in 2009, the FTSE 100 has risen by a nice round 100 percent. But there have been a few corrections along the way. So you could argue that a seven percent fall like we’ve seen over the past week shouldn’t have been entirely unexpected.

But even so, that doesn’t mean that a sudden pull-back is easy to deal with. For some of us, a fall in prices is a buying opportunity. If you’d done that after the EU referendum, you’d have caught the start of a two year bull run. But for others, a sea of red across a portfolio, and the uncertainty of what might come next, is really worrying. When faced with blood curdling headlines (like these below), it’s no surprise that even a modest wobble can spark a panic.


Graham Neary did a great assessment of the price action this week - ably assisted by some brilliant contributions from the Stockopedia community. You can find that here. But on a more general note, we’ve sifted through some of our most popular ‘correction’ articles to bring some updated sanity to all this uncertainty…

1. Face up to volatility

One of the interesting features about the recent pressure on prices is the lack of a clear cause. Some commentary points to concerns over the possibility of rising interest rates in the U.S., together with rising bond yields.

Whatever it is, research into these sorts of turbulent spells in equity markets shows that volatility caused by uncertainty can become a vicious circle.


Some of the most influential work on this subject was done by Robert Haugen (above), who was a quantitative finance professor that spent a lot of time looking at the effects of market volatility. One of his findings was that volatility begets volatility, which in turn makes markets excessively volatile - prices literally freak out.

To combat this, it’s worth thinking about your own time frames, diversification and risk appetite for investing in the stock market. Can you live with inevitable periods of volatility?

Warren Buffett…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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35 Comments on this Article show/hide all

davehfdr 7th Feb '18 16 of 35

would have appreciated some specific recomendations

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Velo 7th Feb '18 17 of 35

"are there any techno-fundamentalists amongst the Stockopedia subscribers ?"

A lot more than you would otherwise first think might be the case, what with this being a Stockopedia fundamentals subscription service.

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poughtibridge 7th Feb '18 18 of 35

In reply to post #311643

I'm a techno-fundamentalist - from my discussions, there are a few of us subscribing on Stockopedia. I have my eye on ASC and JOUL.

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zeibots 7th Feb '18 19 of 35

In reply to post #311658

Velo, I hope you are right I would certainly like to make contact with them. I live in the New Forest area. You are right that the site is mainly a fundamentalist service, the charts are just thrown in to make it look more balanced.

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zeibots 7th Feb '18 20 of 35

In reply to post #311663

Yes, I hope the charting facility will undergo further improvements in the new version of Stockopedia.
Perhaps we should have a Minervini discussion site on Stockopedia, I follow his strategy having read his book about four times. His strategy is so precise that it is a job finding his type of setups putting together growth,volume and price action in the UK quoted shares.

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Velo 7th Feb '18 21 of 35

Yes, I use a seperate charting paid-subscription service. Been meaning to get that Minervini book read (Trade like a Stock Market Wizard?) but happy as is, with my current trend following set-up (it's on my desktop as a free ebook download, for ages now) prefer hardback books though for the sheer tactile feel and also easier on the eyes than a screen - but I blame reading on the internet as the main distraction.

Will move it up the 'must read' backlog as many posters appear enamoured of it.

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Lawman 7th Feb '18 22 of 35

A good article which brings calm when we all feel nervous.

The principles of universal application seem to be:

(1) have a plan and keep to it;

(2) diversify.

Thereafter it depends if you are a trader or a long term investor. I am the latter.

As a long term investor, during my pre-retirement accumulation phase I simply added periodically.

Now is different in that I am no longer earning/ contributing. As such 'buy on the falls' is not relevant.

I have mulled over the idea of selling some equities - e.g. a S&P 500 index tracker - when it falls below the 200 day moving average.

However, my basic plan is: Do Nothing. By rebalancing I have a reasonably defensive portfolio. I hold cash to avoid needing to draw out for at least 12 months.

Final concern: one could rely on diversification and say that my bonds/ wealth preservation funds etc will hold up while equities are falling. However, with the positive correlation of most assets at present, I am not sure I can rely on this. I accepted SMT falling over 10% over a few days, but was struck that PNL and CGT fell by 3% and RCP and RICA by 5% over those same few days.

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zeibots 7th Feb '18 23 of 35

In reply to post #311733

Yes, the name of the book suggests that it is about trading but it is actually about investing with a very clearly designed trend following strategy. The actual timing of the entry points enables Minervini to use his tight stop loss strategy to advantage. His investment performance in open competition against all comers in the USA is simply astonishing. Many commentators can talk the talk quite convincingly but he can certainly do the walk.Get the hard copy, I have read mine about four times and made notes all over it.

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sharmvr 7th Feb '18 24 of 35

Question: I had stocks I was planning to sell - portfolio considerations and profit taking. I failed to act and the last few days happened. I chose to bury my head in the sand while smart people introduced me to £XIV . If I was to sell the same things I have been planning to sell, am I an emotional irrational investor or am I acting to plan. On a more pertinent note, why do I(nvesotrs) not sell when they have made the investment decision to sell.
Asking for advice here and would welcome any useful (and ideally short - no pun) reading material

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vik2001 7th Feb '18 25 of 35

In reply to post #311923

whats the £xiv ?

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Velo 7th Feb '18 26 of 35

In reply to post #312043

Just in case you weren't poking fun at the £ prefixing the spelling of the XIV

What is the XIV?

- It's a synthetic instrument for gamblers pretending to be investors who really belong at Gamblers Anonymous instead. (Nothing wrong with the VIX itself - that's just a like a speedometer guage) - but they've invented instruments to bet the opposite of it. The inventor of the VIX has today announced he's horrified that they've devised a variety of products to gamble against it. The VIX is a volatility measurement tool only.

Here's a link to one saddo XIV trader published today/yesterday who should have gone for a group-hug at Gambling Anonymous meeting instead of playing with synthetic instruments unrelated to investment in any way, shape or form. He lost his entire fortune of $miilions on Monday.


Time for a quote:

Treat the market like a farmer would his farm - and the market will reward you with bountiful crops.
Treat the market like a casino - and it will treat you like a gambler.

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johread 7th Feb '18 27 of 35

Increased volatility like this shows up the speculators who have been kidding themselves that they are investors?

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vik2001 7th Feb '18 28 of 35

In reply to post #312108

i didn't realise the XIV was the opposite of VIX. I had to google it and did come across that same article you posted. insane turning 30k into all that money and poof. well guess that's what gambling does. I know exactly how that feels being a ex-gambler myself.

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zeibots 8th Feb '18 29 of 35

In reply to post #311923

Yes, perhaps the first thing is to know what sort of an investor you are. Lee Freeman-Shor`s book `The Art of Execution` told me a lot about myself. It`s an entertaining and revealing read.
Freeman classifies all investors into groups -- Rabbits,Assassins, Hunters,Raiders and Connoisseurs. There is more or less something from these groups in all of us. It may well focus you on what group you really want to belong to.
Then choose a reliable plan/strategy that suits you and have the discipline to stick to it.

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sharmvr 8th Feb '18 30 of 35

In reply to post #312243

I read a similar article, I think on Stocko - cant remember which conclusion I reached.
Thanks for the reference - I think it would help to spend time reading focusing on psychology/behavior as much as analysis.
Might be useful reading for the nephew's birthday party over the weekend.
Thanks again,

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sharmvr 8th Feb '18 31 of 35

In reply to post #312043

Velo has you covered.
I would have come up with some ETF that shorts volatility - apparently short volatility was all the rage until Monday!
If you liked it at 20, surely you love it at 5!!
Guessing same could be sent for Bitcoin!

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artnoonan 14th Feb '18 32 of 35

In reply to post #311643

I too believe in the power of the combination of both technical (chiefly related to entry/exit timing) and fundamentals related to the higher price drive as an optimum method of trading/investing
I discipline myself to only select stocks for consideration based their fundamentals and I use the excellent tools and NAPS etc on Stockpedia for this and then I try and enter technically on any one or a combination of the following:
- Pullback to a rising trendline or 50, 100 or 200 Moving Average
- Retrace to a bottom pattern, such as a double/triple bottom or significant round number e.g. 100p, 200p, 250p and/or prior price support (horizontal) level etc.
- Evidence of a Stochastic cross up - ideally over-sold, i.e. under 20 on the Daily chart
- Evidence of a Stochastic divergence up
etc. etc .... you get the picture

Conversely I would typically sell when the stockopedia conditions no longer apply or are significantly less valid or there is a significantly better opportunity and/or converse (multiple supporting) technical conditions such as:

- Pulling into the top of a rising trend channel and not seeming to break through it after a bit of time, particularly also combined with
- Over-bought Daily and ideally Weekly Stochastic (>80)
- Running into a toppy pattern, such as double/triple tops; significant round number 1000p, 1100p, or prior price resistance (horizontal) level etc
- Evidence of Stochastic Divergence down and/or Stochastic cross down etc.

Even when I exit ... I may well consider that an instrument might have further to go higher and might look to re-enter after a significant pullback or other conditions previously outlined - particularly when the Stockpedia fundamentals once again stack up.

That's it ... hope that gives a bit of food for thought !

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zeibots 14th Feb '18 33 of 35

In reply to post #315308

Good to know that we have more techno-fundamentalists on this site than I first thought. Interesting how different TA people focus on different indicators as part of their strategy. I am a Minervini and also Wm O`Neil fan so volume/price action is important for me. I look at the WEEKLY indicators for OBV, Acc/Dist and Positive Volume. The big boys -- institutions,funds etc always leave their footprints behind so it`s easy to see if there is accumulation or distribution going on and relate this to the price action. Difficult currently as the volatile market generally tends to distort potential entry as well as exit points.

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Cjenkins8 18th Feb '18 34 of 35

covered warrant ftse puts in sipps have been helpful recently - amazed that so little interest in these - I understand that covered warrants are expensive but there seems little alternative for use in a Sipp
I think put portfolio insurance options should be available in ISAs and SIPPs
The authorities treat the retail investor as idiots
read vineer bhansali on tail risk hedging

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zeibots 26th Feb '18 35 of 35

In reply to post #311663

Yes, poughtibridge , interesting how the Minervini VCP set up worked well for ASC so far and it was quite clearly defined. Not so good for JOUL, also the Stockopedia rating for the former was better.

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