Rocky 1st Quarter Sets Up Cautious Trading Plan


Simpler Trading Team

4 min read

A rocky first quarter in the stock market winds down this week.

There is no lack of stories through the first three months of 2023 – high inflation, central bank actions, rising interest rates, war, economic strife, and bank failures.

Navigating the negative news cycle by focusing on what the market is giving is how pro traders track trade setups with potential profitability.

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Bank failures highlight rocky news cycle

Highlighting the news cycle recently has been bank failures.

Despite calls heralding the end of modern banking these failures are not worthy of apocalyptic cries.

Credit this crisis to errors from novice bankers at Silicon Valley Bank (SVB) mismanaging investments in an isolated segment of the financial world, according to Raghee Horner, Managing Director of Futures Trading at Simpler Trading. She quoted a recent financial assessment of the banking situation that countered media fervor over the situation.

“Right or wrong, it’s a refreshingly blunt take on the assumption that there is always a genius at the helm,” Raghee said. “So it’s logical to ask, what of systemic risk?

After SVB failed, Credit Suisse toppled and the embattled lender was taken over by Swiss Banking giant UBS – with significant loss for certain bondholders.

“Forced mergers are not well-received by bondholders when they get zeroed out by a central bank, but the Swiss National Bank provided ‘substantial liquidity assistance’ to UBS for the takeover,” said Raghee in the latest edition of This Week In The Markets.

Financial markets face more struggle, strife

Raghee noted that stories of struggle and strife will continue across the financial markets and trading world.

“The key is knowing which stories are the market movers,” Raghee said. “This trading environment is far more than a handful of bank failures.”

She pointed out commercial real estate and smaller banks.

“What of the $5.6 trillion market for commercial real estate loans?” Raghee queried. “It’s not news that commercial real estate has not recovered to pre-2020 pandemic levels.”

“However, the attention on the other shoe dropping comes from 70 percent of commercial real estate loans coming from small and medium-sized banks,” Raghee said. “With SVB’s collapse, all regional banks are under increased scrutiny.”

Pro trader tracks ‘sector weightings’

Raghee encouraged traders to understand and follow “sector weightings.”

“The modern markets are a high-concentration, weighted world,” Raghee said. “In other words, more than ever, it’s a small number of stocks and sectors that determine whether the S&P 500, Nasdaq and Dow move higher or lower.”

As an example, Apple, Inc. (AAPL) and Microsoft Corporation (MSFT) are 13.3% of the S&P 500 and 46.47% of the Technology Select Sector SPDR Fund (XLK).

“Keep an eye on these two stocks because where they go the NASDAQ and XLK will go,” Raghee said.

Technology weighs heavily across all three major indexes. Raghee pointed out that XLK is the heaviest-weighted sector in the S&P and the second heaviest-weighted sector in the Dow.

Stay cautious to find potential profitability

One of the continuing stories for traders in this rough market is to not jump too quickly on setups in any direction.

“Given the crosscurrents relating to interest rate projections as well as uncertainty surrounding the banking system, we remain cautious on the near term prospects for the markets,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading.

“The broader market indices have held in relatively well amid the turmoil in the financial system,” Mary Ellen said. “A cautious stance is still warranted however, as breadth has been narrow and key areas of possible upside resistance remain for the S&P 500 index.”

Mary Ellen noted that there is potential profitability in the stock market.

“At this time, we’ll continue to favor stocks that have strong growth prospects and positive charts while encouraging traders to keep positions light,” Mary Ellen said. “In addition, we’re broadening our watch list to include growth stocks in favored areas as well as stocks that fare well in a recession, such as innovative biotech and aerospace and defense stocks.”

For detailed insights into trading current market conditions, check out the Simpler Trading premium reports.