- Matthew Caruso is a position trader, holding his stocks for weeks or even months at a time.
- He focused on the relative strength of stocks and subsections of the economy.
- He then pyramids in a position such that if his thesis is false, he limits his exposure to risk.
The stock market’s COVID-era bull run is about to end.
This year, the S&P 500 has taken back most of its gains from the previous two years. The index is down about 25% since the start of the year. On Tuesday, it was trading at around 3,586, just a few hundred points above where it was in February 2020, just before the market crashed in March.
The raging bull market has drawn many new retail traders to the scene. Just about anyone who could open a brokerage account could have been profitable. But now the tables have turned and even the most skilled traders are learning to navigate the new normal.
Matthew Caruso was commercial actions since 2008, first professionally for the National Bank of Canada and then personally since 2014. In 2020, he is surfing the high waves of the market and pulling a 382% return in the first half. Although it hasn’t been able to match its previous performance, year-to-date it’s still up around 42%, according to records from its brokerage account viewed by Insider.
“What made this year difficult was that you had to balance, first, a very weak market, but yet there were very strong industry trends within that weak market,” Caruso said. “So you had to be flexible enough to always find opportunities when you’re inherently negative.”
He is a position trader, which means he holds his shares for weeks or even months at a time. This means keeping an eye on macro trends and using technical analysis to find sub-sections of the market that are doing relatively well. Below are five key adjustments he has made to his trading strategy this year.
5 changes for the bear market
First, he insists on being more vigilant about risk mitigation.
“In a bad market all your sins are exposed. In a good market you don’t realize you have these issues. And one of them I would say is very important is position size and management your wallet,” Caruso said.
Having a position sizing plan becomes essential in a bad market because you don’t want to move into a trade with more than you are willing to risk, he noted. Many traders make the mistake of thinking they are going to exit at an expected price, he said. However, in a volatile and negative market, stock prices can plunge much faster and steeper and you may not be able to get out in time, he added.
“It’s a year of news driven events with Russia and all of that, and the bear market news is intensifying, the market spreads are increasing, and if you don’t have a good plan for that, a few bad mistakes will ruin your year, maybe ruin your account,” Caruso said.
Second, he suspends his personal beliefs and presents himself with an emotionally neutral attitude so that he can follow the data.. For example, at the start of this year, many of the stocks with the best growth rates were still technology. But if you ignored the overall macroeconomic outlook, you were very hurt. Likewise, if you stick to the belief that oil and gas is old business, while ESG is the future, you’ve missed the opportunity, he added.
Early in the year, he noticed that the oil market was in short supply, which also pushed up other commodities like natural gas and fertilizers. Some of Caruso’s best deals earlier in the year were oil and fertilizer stocks, he said.
Third, it takes into account the relative strength of a title. The simplest method is to compare the performance of the broader market to a stock’s returns. So if the S&P 500 is down 10% but a stock is up 5% in the past 12 months, it is outperforming the market. This tells Caruso that there is something growing with the business or the stock that is a strong driver.
This will make him dig into the fundamentals and headlines to figure out what’s going on. He looks for indicators that signal long-term trends, like strong future earnings or sales. He wants to avoid stocks that have short, single price spikes. This can happen if there is a one-off news headline, such as a drug receiving FDA approval for a phase.
Fourth, he keeps his portfolio diversified, but not just for diversification reasons. He remains mindful of each stock’s correlation to another while sticking to the themes and subsections of the economy he is bullish on.
For example, if exposed to too many oil stocks, a single headline could sink the entire sector. Therefore, it aims to focus on multiple themes and industries, and within that, it spreads across stocks with different market capitalizations.
Finally, he pyramids in all positions, which means gradually buying more shares rather than immediately slapping a full position.
“I will always start with an initial position and if the stock moves up, that proves I’m right. I’ll add more to the stock at different levels along the way,” Caruso said. “So when I’m really right and I catch a six-month trend, I keep adding to that position, it becomes a heavier weight in my portfolio. If I buy a stock and the thesis s turns out to be false, the loss is borne by a very small portion of my portfolio.”