Charles Kirk on Market Volatility and Maneuvering Amid Algorithms

Charles Kirk is an independent trader and the founder of He has been trading and investing in stocks for over 17 years and has been covered in The Wall Street Journal, Barron's, Kiplinger, BusinessWeek and Forbes, among others. Kirk told Benzinga Radio that in today's market environment, which lacks direction and is defined by massive volatility, the key is to preserve capital. He said that he is doing this by trading only ETFs and limiting the number of positions that he has in play at any one time to just two or three, whereas in a normal environment he may have up to 10 positions.

By focusing on his downside and limiting his risk to a few positions, Kirk said that he can focus in on the volatile areas of the markets, attempting to catch the big swings. He added, however, that the crazier things get, the more difficult this can become as the moves are occurring extremely fast. Among his favorite instruments to trade in the current market are the iShares Dow Jones Transport Avg. ETF (NYSE: IYT), the Technology SPDR ETF (NYSE: XLK), the Consumer Discretionary SPDR ETF (NYSE: XLY) and the Financial Select Sector SPDR ETF (NYSE: XLF).

Kirk said that he is primarily looking for who has the balance of power on an intra-day and daily basis - is it the bulls or bears? One indicator that he said has been working recently is to watch the volume on heavily traded inverse ETFs. Kirk told Benzinga that late-day short covering can be seen when a market spike into the close is accompanied by heavy volume on liquid inverse ETFs. This signal has foreshadowed rallies in recent weeks.

Kirk also touched on the effect that algorithmic trading is having on today's market environment. He said that the algorithms have a similar bias as human traders in that they focus on recent patterns that have been working. Traders who can key in on patterns that have been working in the near-term, such as the momentum trade in the last hour of the day, can benefit from being on the same side of the market as the algos. He said that algorithmic trading is also adding to the volatility in the market due to the speed and quantity of orders that these programs put into the market.

One of the risks that Kirk sees in the current market environment is that investors get chopped up because they are unsure of their time frame. He said that today's opportunities exist either in very small time frames, such as three day cycles, or on a much longer-term basis where you are trying to catch weekly and monthly trends. The problem with the latter strategy right now, however, is that you have to have tremendous patience and be able to withstand the volatility. Given the magnitude of the market moves, chances are that you will have to take some significant pain in order to catch a longer term trend.

Going forward, Kirk said that the market remains in a bearish trend, and is in a very vulnerable position. He said that the direction of stock prices will largely be determined by what happens in Europe as we head into 2012. He also noted, however, that the media and Wall Street in general are aware of how important it is that the August lows are not broken to the downside, and said that there is a full court press going on to buoy this market.

Earnings season could potentially be an upside catalyst, and there is also the very well established pattern for the stock market to rise going into a presidential re-election year. Barring any catastrophic news out of Europe and a confirmation of a double-dip recession in the U.S., it still appears possible that a substantial rally is around the corner.

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