Here is what we cover in this week’s stock market update:
- 7 Steps to Allocating Capital in a Hot Market Like Nasdaq
- Stock Market Update – Global Performance Roundup
- Wisdom from Jesse Livermore
- Special announcement from Enlightened Stock trading
How do you allocate capital between markets / sectors / strategies when one part of the market is so strong (i.e. Tech stocks)?
Should you move more capital into the strongest sector?
Should you focus your trading system development efforts on the hottest sector?
I had a great question about this in one of my Trader Success System coaching calls this week and there are some great lessons in this which I want to share with you.
The question was “How do I think about allocating capital to a market that is hot like the Nasdaq right now, especially when a correction is likely at some point?”
This is critically important for our long term performance (and survival), so I want to share my response with you this week…
7 Steps to Allocating Capital in a Hot Market Like Nasdaq
When a market is running hot, like the Nasdaq right now, it’s easy to feel the urge to load up and ride the wave. Every chart looks bullish, the media is buzzing, and you hear stories of traders making a fortune.
But successful traders know this: capital allocation is not about excitement. It’s about balance, risk control, and long-term resilience.
Here are the 7 Steps:
- Start with the Big Picture: Your Entire Portfolio
- Diversify Across Systems, Markets, and Directions
- Avoid Chasing Recent Performance
- Use Backtesting and Correlation Analysis
- Allocate Based on Exposure, Not Just Fixed Percentages
- Keep Allocations Modest for Hot Markets
- Review and Rebalance Regularly
Let’s break these steps down so you know how to think about allocating capital to a hot market, using the Nasdaq as our example.
1. Start with the Big Picture: Your Entire Portfolio
Your capital allocation decision shouldn’t be made in isolation. Ask yourself:
- How much exposure do I already have to U.S. tech stocks?
- Will adding a Nasdaq system genuinely improve my portfolio’s diversification?
If you have no U.S. exposure, adding a Nasdaq trend-following system could open up a valuable growth engine for your portfolio.
But if you’re already heavily weighted in U.S. tech, doubling down could turn a temporary trend into a dangerous concentration risk when the bubble bursts (and yes bubbles always burst… this time is not different).
The goal: ensure you have a portfolio that benefits from strong markets and large moves but doesn’t get wacked when these moves come to an end.
2. Diversify Across Systems, Markets, and Directions
One of the strongest safeguards against risk is diversification. But don’t just diversify across different stocks, I have found the best results come when I diversify across markets, strategies, timeframes and trade directions.
There are 6 different levels of diversification – Click here to learn about them.
That might mean pairing a Nasdaq trend-following system with:
- A mean reversion strategy in U.S. equities.
- A short-side system that activates in market downturns.
- Exposure to other geographies like ASX, Hong Kong, or TSX.
The goal: smooth out your equity curve by having systems that thrive in different environments. This way, a slump in one area is offset by gains in another.
In fact one of my favourite things to do is develop strategies that will make money after the next trend change. For example, if the Nasdaq is hot and you want to allocate more money to it, I would consider adding another longside system to the Nasdaq if I ALSO have another short side system that will benefit when the current trend comes to an end.
3. Avoid Chasing Recent Performance
It’s tempting to put more capital into whatever’s hot, but that’s a dangerous game.
Markets that have been red-hot often cool quickly. If you over-allocate to a single market based on recent returns, you could face a large drawdown right after you commit more funds.
Instead of asking, “How much money could I make?” ask, “How does this fit with my long-term portfolio mix?”
It is hard to remember you have a long term plan, solid systems and a rigorous capital allocation approach when your buddy Bob from work is making a killing by being leveraged long Nasdaq with no exit strategy.
This is one of the hardest things in trading, but one of the most important. If we are going to survive long term in the markets, we have to trade in a way that will keep us in the game.
This might mean some temporary underperformance compared to the clown in your office who has leveraged into the Nasdaq all time highs. But in 10 years time they will still have the scars from margin calls when the market tanked and your account will be at new equity highs!
4. Use Backtesting and Correlation Analysis
Before deciding to allocate a chunk of capital to a new Nasdaq system that looks ultra profitable right now, combine all of your strategies using into one portfolio and test different capital allocation percentages to each one.
You will want to check things like:
- What’s the correlation between your existing systems and the new Nasdaq system?
- Will it tend to win when your other systems lose?
- Does allocating capital to the new system increase return and reduce drawdown of your overall portfolio?
Low correlation is your friend here. It means your systems won’t all draw down together. This is far more important than dropping another 25% of your capital into the hottest market on the planet so your buddy Bob finally stops telling you you are missing out on the opportunity of a lifetime.
5. Allocate Based on Exposure, Not Just Fixed Percentages
Instead of assigning a fixed percentage to every system, look at how your trading system exposures overlap.
For example:
- If your Nasdaq trend-following system makes money in bull markets…
- And your short equity index system thrives in bear markets…
…you can allocate more aggressively to both without exceeding your overall risk limit, because they don’t tend to be invested at the same time.
6. Keep Allocations Modest for Hot Markets
In my recent coaching call, we discussed keeping the allocation to any single new system, especially one in a hot market, modest at the start.
Why?
- It lowers the psychological barrier to launching it.
- It limits potential losses if you happen to enter right before the trend stalls.
If it proves itself in live trading, you can always scale up.
7. Review and Rebalance Regularly
Markets evolve, and systems go through performance cycles. So check your allocations quarterly or semi-annually:
- Are all of your systems still performing in line with expectations?
- Do you have sufficient diversification?
- Have correlations between systems changed?
- Does the Nasdaq still deserve the same capital weight?
This ensures you adapt to shifting conditions without making knee-jerk reactions to short-term noise.
The Bottom Line
Allocating capital to a hot market like the Nasdaq should not be about jumping on a bandwagon.
It’s about making a deliberate, data-backed decision that strengthens your overall portfolio – protecting you in downturns, while still allowing you to capture the upside.
Stock Market Update:
As you can see from the table below, this week was green across the board and the last year has been looking pretty healthy in most markets despite the February – April correction.
The S&P 500 is still trying to recover after the correction last week, but the Nasdaq 100 closed the week at a new all time high (just).
Look at the charts below… do you notice anything interesting?
Despite all the AI hype and focus on the Nasdaq, it is the Canadian stock market that has been making new all time highs the most steadily, not the Nasdaq! There has been a very smooth, low volatility uptrend in the TSX Composite ever since the dip in April.
But nobody talks about the Canadian stocks… International diversification just doesn’t get enough focus because everyone wants to trade what’s in the news.
Something to think about.
Again I am reminded here that no matter what is happening in the world, the best way to get steady performance is with a portfolio of systems diversified across a range of strategies / markets / timeframes. It may underperform the hot sector at times, but it has a much better chance of out-performing long term.
Trading Quote of the Week
“To anticipate the market is to gamble. To be patient and react only when the market gives the signal is to speculate.”
~ Jesse Livermore
Why This Quote Matters Now This week’s swings after the dip last week were driven by tariff chatter, earnings surprises, and shifting headlines. This is a a perfect reminder that guessing is expensive. Premature trades often lead to frustration, not profit.
Patience Over Prediction Livermore’s words echo one of the most important truths in trading: reacting to clear, objective signals is the professional approach. Predicting, on the other hand, is just rolling the dice with your capital.
Headlines Can Be Dangerous Geopolitical moves, economic data drops, and policy changes can all whip the market into a frenzy. But chasing that noise puts traders right in the emotional danger zone. Your trading systems exist to keep you out of that trap and firmly on the path of rules-based execution.
Systematic Trading Wins in the Long Run The disciplined trader follows tested systems that define exactly when to enter, exit, and manage risk. That’s speculation done right, making decisions based on probability, not emotions.
In Summary Good trading is not about predicting the next move, it’s about waiting for the market to show its hand and acting decisively when it does.
Final Thought
My team and I have been busy putting together something new…
I know that many of you trade using Amibroker, some use Realtest, still others TradingView / Metastock / Beyond Charts / Meta Trader and maybe some others as well.
So we have been busy putting together a collection of trading strategies that you can use on ANY trading software.
Would you like a collection of solid, robust strategies that you can use no matter what trading software you run?
If so, comment on this post with what your primary trading software is and I will put you on the waiting list – I am extremely excited about this new product because it opens up our ability to help you improve your trading no matter what platform you use.
I look forward to hearing from you!
Given you have read this far, please do me a quick favor and also and give me a score so I know if you loved or hated this update (10 = Loved It; 1 = I hate this, I am unsubscribing)
I appreciate you – thanks for reading.
Remember – You are only one trading system away!
Adrian Reid
Founder – Enlightened Stock Trading
P.S. Whenever you’re ready… here are 3 ways I can help you improve your trading:
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