While the world waits to hear what Janet Yellen has to say about Fed policy this morning, it is probably a good time to expand on the idea that the character of the stock market has changed and look at what investors can do about it.

Last week, it was suggested that moves in the market - especially on days when something big occurs - have become exaggerated due to the proliferation of algorithmic trading. "When a bunch of trend-following algos start chasing each other's tail, the end result is an increase in the size of daily moves," was one of the key points made.

As we explained, the key here is to understand that daily price action is becoming more and more volatile (and perhaps even a bit artificial) - in both directions. Once the algos get on a roll, they often just keep going until the closing bell rings. Then traders come in the next day and start all over again.

And to reiterate, we're not complaining about the computers here. Algo-driven trading is fine, fair, and completely legal. No, the key point being made today is that investors need to recognize that the game is changing.

What Can Investors Do?

In talking to investors (professional and otherwise), it is obvious that this topic is important. Most folks recognize that the game is moving faster and farther than ever before. However, very few have any ideas about how to adapt their strategies to the changing environment.

So today, we will discuss five different ideas to help combat an environment where intraday volatility is increasing and the moves have become exaggerated.

So without further ado, let's get to it.

Adjust Your Time Frame

The first thing that an investor can do is to adjust the time frame you are working with. For example, if you trade intraday, you simply must realize that unless you can trade at the speed of light, you are at a competitive disadvantage. Don't for a moment think that you can keep up with the algos after news, earnings, or a Fed announcement. So, in short, stop trying.

In addition, it is probably a good idea to lengthen your time frame. Don't feel like you have to go home flat. It's okay to hold a position overnight. Remember, the intraday moves are often exaggerated. As such, you may need to hold positions longer in order to stay in tune with a move. The ride may be bumpier, but the trend can indeed be your best friend at times.

Trade in Steps

The next idea is to stop being a "plunger" and move in and out of positions in steps. In other words, you don't need to put an entire position on all at once. You can do it in stages.

This is especially true during times when the market is making a big, algo-induced move. So, if your strategy says to buy and the market is really movin' on up, it might be a good idea to put on a partial position to start with. Then you can add to that position on any downside volatility that comes along.

Discover Mean Reversion

Mean reversion strategies assume that when a stock or index gets too far away from its mean, it will eventually move back to its normal trend. This is where overbought/oversold are often used. For example, if a stock is moving up nicely and then it starts to "go parabolic" it might be a good idea to take some profits and wait for the stock to pull back a bit.

This concept is also referred to as swing trading. While it may sound overly simplistic, the key here is to buy low and sell higher. Thus, when stocks become oversold and are nearing a support zone, swing traders will buy the dip and look to sell the position in the next few days or weeks when the ultimate recovery/rebound occurs.

Granted, such a strategy does not work worth a darn in a strongly trending market. Remember, when the bulls get on a roll such as they did in 2013, the trick is to jump onboard and enjoy the ride. However, it is also important to recognize that all trends end at some point. And once a strong uptrend has ended, implementing a mean reversion or swing trading strategy can add serious value to your approach.

Stop Staring At Charts

Back in the day, trendlines, moving averages, and support/resistance zones were drawn with a pencil and a ruler. However, today every trader on the planet has access to fancy charts and more indicators than you can shake a stick at. As such, it might pay to recall that "something everybody already knows isn't worth knowing."

The point is that everybody in the game is looking at the same key levels on the charts. And this is one reason why an intraday move will accelerate once an important technical level is breached. You see the move, your colleague sees the move, and rest assured, the algos see the move as well.

Because of this, it is probably a good idea to put less emphasis on the key levels that everyone is watching. Don't base your entire trade on a support zone giving way. Because if and when it does, the day may turn into a repeat of February 3rd in a hurry.

Take Your Foot Off the Gas

Particularly when the environment gets violent, such as it has since mid-January, it might be a good idea to play the game more conservatively. Trade less. Trade smaller. And maybe even hold some cash when the VIX starts jumping. If you ever find yourself dazed and confused, just take a break. There is no shame in simply admitting that the action doesn't make sense.

Remember, there is no law that states you must be in there trading each and every day. And perhaps most importantly, it is always a good idea to sell to the sleeping point. The bottom line is life is too short to lose sleep over a trade or a position in your portfolio.

Finally, the real key to this meandering missive this morning is that it is important to recognize that market environments are constantly changing. The trick is to be able to identify the type of environment and to know what tools to use to best deal with whatever Ms. Market is serving up at the time.

So, the times, they are a changin'. The question you have to ask yourself is what are you doing about it?

At our shop, we're adding managers and diversifying across strategies and methodologies so that we can hopefully keep pace with the changing environment. We probably won't get it exactly right, but we are definitely making some adjustments.

Looking for Guidance in the Markets? We can help...

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Looking For Money Management Help?

If you are looking for help with money management, check out Heritage Capital Management's Active Risk Manager Service - or call Heritage for more information at (630) 250-4700.

ALL NEW: The next generation of the Daily Decision system is now available to clients of Heritage Capital. The new and improved approach (which is not available in subscription form due to the complex nature of trading the program) utilizes swing trading during neutral market environments, multiple indices for long positions, incremental moves in and out of the market, multiple managers and multiple strategies - with the overall goal being reduced volatility and a smoother ride. Contact Heritage for details at (630) 250-4700.

Turning To This Morning... Stocks continue to regain their footing after experiencing the first 6% pullback in quite some time to start the year. All eyes will be on Janet Yellen as she testifies before the House Financial Services Committee this morning and the Senate Banking Committee later in the week. Yellen is not expected to rock the boat and her written testimony will be released to the media at 8:30 am eastern. Overnight markets were up across the board and U.S. futures point to a stronger open on Wall Street. 

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets: 
- Japan:      Closed 
- Hong Kong:  +1.77% 
- Shanghai:   +1.78% 
- London:     +0.78%
- Germany:    +1.30%
- France:     +0.63%
- Italy:      +0.43%
- Spain:      +0.72%

Crude Oil Futures: +$0.11 to $100.17

Gold: +$9.90 at $1284.60

Dollar:  lower against the yen, euro and pound

10-Year Bond Yield: Currently trading at 2.691%  

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +5.81
- Dow Jones Industrial Average: +51
- NASDAQ Composite: +13.54

Thought For The Day...

Love,compassion and tolerance are necessities,not luxuries. Without them,humanity cannot survive. - Dalai Lama.

Are you getting all the market research you need?

Remember, you can receive email alerts  for more than 20 free research report alerts from StateoftheMarkets.com including:  

• State's Chart of the Day - Eeach day we highlight a top rated stock with a positive technical setup
  
• The Risk Manager Report - Stay in tune with the market's risk/reward environment
  
• The “10.0” Report - These are the REAL best-of-breed companies
  
• The Insiders Report - See what the people who know their company's best are buying
  
•  ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.
  
•  The SOTM 100 Portfolio - The top rated stocks in each market sector
  
•  State's Market Models - Each week we quantify the "state of the market" with a series of models
  
•  The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Our Mission Statement:

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Follow on  Twitter: @StateDave

---

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.