As the Nasdaq 100 dropped 25% from Feb. 19 to April 7, this column admittedly got negative with a focus on downside risks and protection of capital. Half the headlines had the words "market correction" in them.
The others had words like, "market shock," "rough month," "reduce losses," and "why we wait." But that changed this month. Instead of "Sell in May and Go away," we've focused on ramping up exposure this month. Here's what changed.
Don't Fight Bear Markets
While the SwingTrader move to cash on Feb. 21 ended up being prescient (1), that only works if you get out early enough to avoid carnage and get back in early enough that you participate in the next rally. But how do you know?
The April 7 low was encouraging action (2) but it was amid such heavy volatility that we still remained on the sidelines for another two weeks. We were looking for the market to start checking off more boxes of strength.
It wasn't until we had a follow-through day (3) on April 22 that we started ramping up exposure. Many stocks were still deep in bases so we started with the Invesco QQQ Trust that tracks the Nasdaq 100.
IBD Coach Shares How He Increases Exposure Gradually
We will often go with a leveraged version of the Nasdaq 100 but because of the volatility, and how far we were below the 200-day moving average, we wanted to start conservatively.
Nasdaq 100 Checked More Boxes
As the Nasdaq 100 kept checking boxes of strength, we kept adding exposure. At first tentatively with ETFs then eventually with more individual stocks. As the Nasdaq 100 closed above the 21-day line our exposure for our model portfolio had already jumped to 40% invested (4).
A successful test of the 21-day moving average line opened up a lot of upside reversal setups (5). That saw us finish the day over 60% invested and then 80% the next day as we gapped up above the 50-day line.
But since we were still in a headline driven market and below the 200-day line, we still had reservations. As we headed into the weekend on May 2, with the 200-day line acting as potential resistance, we reduced exposure back down to 45% out of caution (6). We had a big cushion of outperformance on SwingTrader. While we were likely to retain it even with a market shattering headline, we still make protection of capital a top priority.
This was the case the following week heading into the weekend on May 9. The Nasdaq 100 was again bumped up right against its 200-day line (7) so we went from fully invested down to 73% invested before the trade talks with China commenced.
Why We Exited The Nasdaq 100
The market reacted favorably to the China trade talk results and it sent the markets soaring. The Nasdaq 100 was finally above its 200-day line in a decisive manner (8). Initially we increased our position.
But as the week went on, we eventually scaled out of the position and eventually exited (9). Why? It wasn't because we were negative on the market. In fact, we started using margin for our model portfolio. We're also looking at a power trend starting for the Nasdaq composite and S&P 500, which bodes well for prospects.
There were two main reasons for the exit. Locking in profits into strength is a basic tenet of swing trading and it made sense from that regard given how much we had gained on the Nasdaq 100 investment. But it was also a recognition that the position started as a conservative way to gain exposure in a non-leveraged market ETF. Now that we are in a power trend, we are looking at more aggressive positions with greater potential.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
