There have been some sizeable swings in the stock market lately, both day-to-day and even during single trading sessions. We saw it again on Monday. The market opened higher on the back of strong retail sales and hopes that the current back and forth between Israel and Iran is over for the moment. But then around noon ET, the S & P 500 topped out and reversed lower. It closed down 1.2%, with a more than 2% move from session highs to session lows. Friday, the index lost nearly 1.5%. Here’s how Jim Cramer and the Club think about volatility and how we handle it. When the market gets crazy, we turn to the S & P 500 Short Range Oscillator. After Friday’s sell-off, it flashed a minus five reading, meaning oversold. Monday’s action could change that. We’ll have to see. The Oscillator is calculated after the market closes. But true to our discipline we put some money to work on Monday morning: adding to our newest position Best Buy . This is what the Oscillator is and how it works. “Put simply: The S & P Oscillator is our most trusted indicator of how to act during big upswings or huge downdrafts in the market. ( Club members can get a deal on the Oscillator .) At its core, the Oscillator helps understand when the market has either become overbought and potentially due for a pullback, or too oversold and positioned for a bounce. What the Oscillator does best is call turns in the market. … Anything above a plus 4% would indicate the market is overbought; anything below a minus 5% would indicate the market is oversold.” — Cramer’s favorite market indictor; March 31, 2022 While we do like to key off the Oscillator and get money to work when the market reaches oversold territory, it’s crucial to remember that oversold does not equate to a stock being undervalued. “The S & P Short Range Oscillator, which Jim Cramer has used for decades dating back to his Wall Street days, is what’s known as a momentum indicator. It does not account for the valuation of the S & P 500, only the speed and magnitude of a market move in a given direction. … For individual stocks, traders often look at the Relative Strength Indicator, which is also a momentum gauge. For this tool, 70 is the threshold at which a stock is considered overbought, while 30 is the downside threshold used to indicate an oversold condition. … Importantly, though, these are strictly technical analysis-oriented tools. They have nothing to do with valuation. To determine whether an index such as the S & P 500 or an individual stock is overvalued or undervalued requires an analysis of the price-to-earnings (P/E) valuation multiple.” — Overbought vs. overvalued market; Dec. 10, 2023 One factor to keep in mind is that fundamental analysis is all about being unemotional, objective and rational. However, when fear grips the market, especially fear based on the kind of geopolitical tension that has terms like World War III getting tossed around, we often see irrational behavior factor into the price action as well. The Oscillator and RSI are technical measures that can help us directionally, reading certain stock chart levels can help confirm or give you a reason to pause based on your fundamental reasons for ownership. After all, a stock chart doesn’t discern between what’s rational and what’s irrational, it provides information that is the result of past supply/demand dynamics for the stock in question, regardless of why investors are buying or selling. “Longer-term investors, like us, looking to build positions over time and buy as prices come down in order to maximize longer-term upside are better off focusing on the fundamentals and leveraging technical analysis to help determine when to gain or increase exposure and not to determine if they should have exposure. When the fundamentals and the technical setup are in agreement, then you could be looking at a very good opportunity to make some money. … A great resource to help determine the best targets for your excess cash is our fourth-quarter earnings scorecard (and the Q1 numbers starting to flow in ). Though, of course be mindful that we are now in the first-quarter 2024 earnings season so be sure to keep an eye on our alerts and constantly doing the homework so that you are always on the lookout for the most up to date information.” — How investors can decide when to buy; April 3 The last thing to keep in mind is that you want to have levels in mind ahead of time. You don’t want to be sitting at your computer, staring at your screen when the major stock market benchmarks are getting knocked all around the place. If you have your levels picked out ahead of time, you can be better equipped to hold your nose and do some buying, taking comfort in the idea that you’ve already done the research and made your decisions best on all the information at your disposal. And, if the flipside is true in an over-bought market, having the courage to trim when emotionally you’re thinking let that baby run. In both cases, the fundamental information is what matters, not the price action of a stock caught in a whirlwind of indiscriminate selling or buying. “Investment opportunities result from a dislocation between the stock price and the fair value of the business. That happens when the stock of a fundamentally strong company, is in decline. … Watch earnings estimates and look to buy at valuations that are in line with or below what we’ve seen in the recent past. The five-year average on forward price-to-earnings ratios is a good benchmark.” Bottom line It may not feel like it on days when market swings are pronounced — but for long-term investors, it’s crucial to keep in mind that volatile, down markets in which stocks are dislocating from their underlying business fundamentals are where the money is made. Buy low sell high. In turn, up markets can be good times to take profits on names you pre-identify as possible trim candidates. Traders may equate volatility with risk, but long-term investors are better served by realizing that volatility is where opportunities lie. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Traders work on the floor of the New York Stock Exchange during afternoon trading on April 09, 2024 in New York City.
Michael M. Santiago | Getty Images
There have been some sizeable swings in the stock market lately, both day-to-day and even during single trading sessions.
We saw it again on Monday. The market opened higher on the back of strong retail sales and hopes that the current back and forth between Israel and Iran is over for the moment. But then around noon ET, the S&P 500 topped out and reversed lower. It closed down 1.2%, with a more than 2% move from session highs to session lows. Friday, the index lost nearly 1.5%. Here’s how Jim Cramer and the Club think about volatility and how we handle it.
Read More: 4 ways to approach daily swings we’re seeing lately in the stock market