Make money in a flat market

One of the most frustrating things is a flat stock market. It is like being in a relationship with someone who you can not make up their mind. They give you mixed signals, hope, then ignore you. This is what it feels to be an investor out there swinging away in a flat market. You feel like you are pretty wise and are making all the right choices, but the relationship is not going anywhere. How do you invest in a flat market?

There are times that the market will be in a seven-year uptrend, and all boats are going up in this raising tide and we are  all smoking cigars rolled in one-hundred dollar bills and congraulating ourselves on being masters of the universe. On the other hand, there will be times when equities are in a 18 month downward trend or at least behaving badly enough to be out of the market or short. In the case of the latter you are should be out of the market and drinking a lemonade and spending time with your kids.

However, what can you do if the market is not trending in a clear pattern up or down, that is a flat market. If for example, you are using moving average or some technical indicator to and there are no clear signals, this seems to frustrate people. The index will dance around the moving average and give many false starts to an upward or downward trend. What to do, what do to?

How to invest in a flat stock market

Two or Three false starts in a year qualify as a flat equity market and you need to start looking at sectors rather than markets.

Flat market investing

  • The market neutral option – In all markets some people are market neutral and it is only a matter of shifting your asset allocation and positions. It is the ultimate form of diversification. However, I personally am not doing this right now. In theory I am a market neutral investor, but in practice I am market timer. That is I look at the trend and determine if I am in or out.
  • The finding only quality stocks option – I like to use quantitative investing screens. Even if the market tanks your holdings will probability not go down as much. Therefore, in a flat market if you find some good picks you will profit as there is always a stock out there somewhere that is a winner. The problem is we do not have perfect information. If we did we would all be millionaires by the end of the year.
  • The Stan Weinstein solution –  His idea for investing is easy. You need to stop looking at the market as a whole and start doing sector analysis. Individual sectors or even countries have indexes just like the S&P. These sectors have a mind of their own some are only slightly correlated with with the market. Stan Weinstein always recommended identifying sectors (or countries) that are in stage breaking out or in stage two. If you have a good stock in a good sector it will usually outperform a great stock in a poor sector.  From this universe of stocks choose the best. If it is so simple why do so few people do this? I do not know. Stan Weinstein often wrote about his, how investors would be trading stock tips over their chicken Kiev dinners but would not do something basic like trend analysis.

My personal investing mistake – I personally skipped trend analysis on sectors in this flat market recently. It was a mistake. I bought a stock  PWRD that by all calculations should have been a winner. I think it still will do well. But the problem was the group  (Chinese software stocks) was out of favor and trending down. In a bull market this would not have mattered as much, but in current market conditions, it does matter. Now I own this stock for the long-term.  If you have a flat stock market you have to be more aware what other equities are doing in the group are doing. This is because groups move in tandem.

What some stock traders do that I do not – On the other side of the spectrum there are traders and people using sophisticated software to analysis every gyrations of the market, like it means something. Every pattern is like a sign from above. However, in my experience it is a very hard way to live. It is better you analysis the general trend, whether it be the index or the sector in the case of a flat market and screen quantitatively then use your own wits to pick the stocks.

Life is too short to be spend in front of a computer screen looking at graphs and numbers, even though there is a certain strange exhilaration from living this way. The main thing is to remember your idea is to have fun at life and investing is more a tool. If you want to study investment theory as an end in itself, this can be interesting, but I do not believe in playing the market for the fun of it. For fun I play chess, for making money I invest based on probability.

Therefore, from the above choice above I in practice use market analysis, quantitative screens and picking based on companies that I like. However, in reality whenever I have added sector analysis, especially in a flat market or an uneven economic recovery, I have made the most money.

Why does my theory about flat market investing not always match my practice? Because I am only human and I sometimes behave like a person in a relationship (I am very happily married) who stays in a relationship even though I know it is all wrong. This is the only way I can explain my and other people’s irrational investing behavior.

A recession or depression or lack luster growth for the aggregate economy is a hardship for many. But for you personally it does not have to be, but rather an opportunity to make money in stocks. It is nothing more change. Let me know if you have had any investment experience investing in a sideways moving equities market.