When it comes to analyzing the market and deciding how much capital to commit, everyone has different strategies. For me, I learned many of the principles taught by Jesse Livermore and William O’Neil. Specifically, follow the price action of leading stocks and analyze the price and volume of the major market averages. For example, when I see leading stocks break down and distribution builds up in the market, I raise cash and wait for better conditions. Here’s the biggest challenge: Quantitative Easing (QE).

QE is a major wild card for the traders and investors who were taught these methods. Since the Fed announced their never-ending QE policy, it feels like almost every time I see warning signs and turn cautious, the market magically picks up a bid and grinds higher. It is really amazing! If Taylor Swift wrote a song about this market, it would be called the never, ever, ever, ever-ending grind up higher. Trust me, I’m not complaining about it, I’m simply making the point that it is challenging and forces you to adapt. I recently wrote a blog post titled “You Adapt, Evolve, Compete or Die.” This is one of the major things I was referring to in that post: Adapting to the QE market conditions.

Another challenge is that it feels as if the major indexes are grinding higher, but not individual stocks as much. For example, when the averages had strong runs in 2003 and late 2010, TONS of leading growth stocks were up 300-700%. There are many stocks acting well in this current rally, but their advances feel muted compared to some of the explosiveness I’ve seen in the past. Again, you simply have to adapt to this.

Another major curve ball for investors is that we are in year 5 of a Bull Market that began in March 2009. The solution for this is simple: Don’t get caught up in labeling markets! Who cares if you want to call it a bull market, a cyclical bull within a secular bear, a monkey in a tree chasing a cat within a traveling circus…it doesn’t matter! Just stick with the terms uptrend or downtrend and stop trying to be an economist about the whole thing.

So, back to the big challenge: What is someone who learned certain strategies supposed to do when some of those teachings are not working? BE FLEXIBLE AND BE OPEN-MINDED! No matter what strategy you use, you have to accept that things won’t work all the time. Don’t get me wrong, I will ALWAYS stick to my loss-cutting principles, but I will also make certain adjustments based on market conditions. I can’t tell you what to do because I don’t know your time frame, but one thing I can tell you is that you can’t ignore the power of this Fed-driven liquidity. Good luck trading!

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