As I write this Tuesday afternoon just after market close, investors worldwide have been driving stocks to new all-time highs while ditching U.S. Treasuries and other global bonds based on expectations that President-elect Donald Trump will deliver growth.
That's tantalizing from an investing standpoint, but I see another opportunity that could create jaw-dropping profits.
A short-term tactical trade I'm calling the "Trump Dump."
Here's what you need to know.
President-elect Donald Trump had a simple message on the campaign trail - spend, spend, and spend. And that's what the markets are reacting to, now that he's won.
Longer term, there's no question in my mind that you want to be on board.
Not only does President-elect Trump want to rebuild our nation's crumbling infrastructure, but he also wants to take it to world-class standards. Bridges, tunnels, ports, highways, airports, schools... they're all on the list. That means hundreds of millions of dollars headed right into our economy and, hopefully, into your pocket if you're following along.
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More immediately, though, there's something else brewing, and that's what I want to call your attention to today.
A short-term tactical trade I'm calling the "Trump Dump."
To be clear, I am not suggesting the markets are going to crash, nor am I telling you to run for the hills.
Leave that to the alarmists who doom themselves to terrible results by trying to predict the unpredictable. They'll never learn.
What I'm talking about is diversifying your investing strategy by blending the longer-term investment perspective we talk about often with a purely technical, short-term tactical move.
The setup is pretty straightforward based on what I am seeing on my screens.
First, there's a ski jump - meaning prices have jumped sharply higher - at a time when emotions are running higher than normal. That's never a good mix because what goes up, must come down.
Second, money is running into the markets recklessly. According to ETF Daily, more than $14 trillion has entered the S&P 500 ETF Trust (NYSE Arca: SPY) since the election, which is a stupidly large amount of money based on nothing more than the fear of missing out, or "FOMO" for short. A $5 billion flow is normally enough to set off my radar, so we're talking nearly three times that here.
And third, momentum has narrowed with each new uptick, yet volatility has fallen by nearly 40% from a VIX reading of 23.01 on Nov. 4 to only 13.72 where it's trading as I type. That tells me new money is becoming pickier while also running out of things to buy.
Seems to me that traders are reaching a point where they're likely to take a breather - a term that can mean any number of things, ranging from a simple pause in buying to profit-taking.
For our purposes, it's a little of both.
The official term for this is "consolidation," which is usually characterized by limited trading activity, range-bound pricing, and indecisive trading. That's what you're going to hear in the news and see on the Internet in the next few days.
Many inexperienced traders (and even some professionals) regard this as dangerous because the indicators they normally look to don't apply. Moving averages, for example, are irrelevant when prices trade in a very limited range.
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What they don't realize in their rush to micro-analyze the situation is that they're overthinking things. The far more profitable alternative is always to keep it simple.
...when traders stop buying, they start selling
...when prices are too high, they come down
...when people run out of things to buy, people who got in early start taking profits
That's where the markets are today.
The post-election updraft is running out of steam after six winning sessions and three consecutive record-setting closes. It needs a short-term correction, if for no other reason than to set up the bigger run we know is in the works.
There are three ways to play along:
- Buy the ProShares Short S&P 500 ETF (NYSE Arca: SH). It's an inverse fund that will appreciate as the S&P 500 drops.
- Buy a leveraged SPY inverse fund like the ProShares UltraPro Short S&P500 (NYSE Arca: SPXU), which will appreciate three times the amount of an S&P 500 drop.
- Buy "at-the-money" puts like the Dec. 30 2016 SPY put options SPY161230P00216000. That'll give you about 45 days to let this trade play out while also keeping risk down to manageable levels. Right now they're trading at around $3.28 per, and a 4% drop to around 208 potentially doubles your money based on my quick, back-of-the-envelope calculations.
To be fair, there are all sorts of ways you could play this. However, I've outlined three buys very deliberately because it means your risk is limited to the penny. No margin, no surprises, and no worries. Plus, the trades I've shared with you are easy to understand and easy to implement, even for beginners.
Discipline is key.
Generally speaking, I'm a big fan of the 2% Rule - meaning you never risk more than 2% of your capital on any given trade, especially when it comes to speculative short-term plays like this one. Critics often tell me that's too tight, but I find, more often than not, that they're the same bunch who think Vegas table games are winnable.
There's no doubt that limiting any trade to 2% of tradable capital limits your upside. But - and this is important - it also limits your downside. That's because you can be wrong 10 times in a row and still not blow up more than 20% of your money.
The other thing to think about is that you want to be in, make your money, and get out. Many inexperienced people - heck, even the pros from time to time - get tripped up because they hang on too long, especially when it comes to the triple leveraged funds which must be rebalanced daily, and to options where time decay is working against you every minute you're in it.
The goal here is to share a highly technical setup that can help you capture big profits as the markets reach a natural decision point.
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