Adapting trading strategies to volatile markets – May 25, 2022

The 2022 bear market has undoubtedly been one of the toughest market environments to navigate in recent decades. The volatility frustrated both bulls and bears, as the seesaw action made profiting long or short problematic.

But traders who are able to adapt their strategies to volatility can reap substantial profits. When most stocks are falling, it makes sense for profits to be lower than normal and for losses to be bigger and more frequent. There are several ways to mitigate any potential downside impact and adapt our strategy to the more volatile environment, including:

1) Lower than normal position sizing, leading to less capital commitment

2) Tightening our stop loss/sell target

3) Take profits faster than normal

4) Target leading industries for long positions

Once the market starts to improve and we see that our recent investments are in the right direction, we can raise those levels back to where they were before.

Regardless of your individual approach to the market in investing or trading, there is only one way to protect your portfolio from a major loss. Selling at a small loss before it turns into a big loss is the only way to ensure that a devastating drawdown does not occur in the context of a portfolio.

The most important thing during bear markets is to avoid big mistakes. We want to put a plan in place that will guide us when the market tests our resolve. The stock market has a way of proving the majority wrong. Making investors feel reckless is the market’s way of tricking them into acting foolishly. It is essential to remain disciplined and not to deviate from our strategy.

One way to improve our results during corrections is to target stocks in major sectors. The Zacks Oil and Gas – Exploration and Production – USA industry is currently ranked in the top 2% out of approximately 250 industries. Because it is ranked in the top half of all industries ranked by Zacks, we expect this industry to outperform over the next 3-6 months. This group has risen by almost 50% this year against a loss of -17.2% for the S&P 500. Note also its promising characteristics:

Image source: Zacks Investment Research

Let’s take a look at a Zacks Rank #1 (Strong Buy) action within this leading industry.

Chesapeake Energy Corp. (CHK Free report)

Chesapeake Energy is an independent energy exploration and production company. CHK is engaged in the acquisition and development of properties for the production of oil and natural gas. The company has interests in approximately 8,200 gross producing wells and 661 million barrels of oil equivalent reserves. Chesapeake Energy was founded in 1989 and is based in Oklahoma City, OK.

CHK has exceeded earnings estimates in three of the past four quarters. The company recently reported first-quarter EPS of $3.09 at the start of the month, a positive surprise of 25.61% from the consensus estimate of $2.46. CHK delivered a surprise 23.46% over the last four quarters of average earnings, helping the stock jump 110.3% over the past year.

Chesapeake Energy Corporation Price, Consensus, and EPS Surprise

Chesapeake Energy Corporation Price, Consensus, and EPS Surprise

Analysts agreed on the revisions and raised earnings estimates across the board. Current quarter EPS estimates are up 10.93% over the past 60 days. The Zacks consensus estimate for the second quarter now stands at $3.45, translating to an astonishing potential growth rate of 110.37% from the same quarter last year.

Be sure to put CHK on your watch list as the energy company continues to outperform.

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