Date: 4/22/2021
Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
You made incredible gains from November to January, survived the February and March sell-off, and April helped get you back on top.
A crazy year right?
Not if you’ve been trading for a while.
What if I told you that nearly everything that happened in this time frame was perfectly normal?
Every professional trader with a couple of decades of experience could have predicted most of what happened.
The ridiculous talking heads on the mainstream news outlets always have an ex post facto explanation of market behavior.
Tensions with China. Post-election turmoil. Rioting in the streets.
Every star analyst seems to have the answers. However, it doesn’t take much more than little creativity to come up with seemingly plausible reasons after the fact.
It’s merely SPECULATIVE NONSENSE.
Infotainment intended to keep you watching like most of the rest of the news.
My students and I weren’t surprised by much of anything.
Once you understand the seasonal ebbs and flows, you’ll have a reasonable idea of what to expect and how to position yourself throughout the year.
We’re currently in earnings season.
For advanced traders, it’s a time of great opportunity. Playing short-term run-ups, straddles, and butterflies.
However, for options novices, it can be devastating.
No one really knows what will happen to a stock’s price post-earnings. Regardless of whether the company missed or beat expectations, the stock price could skyrocket, plummet, or do nothing at all.
How can you avoid all the risks and stress without getting out of the market entirely?
Start trading sector and index ETF or ETNs.
The market is divided into many indexes, sectors, and subsectors based on company type. With ETFs and ETNs, these can be traded as a whole, so you don’t need to worry about the vagaries of individual companies.
For example, if you’re bullish on mining stocks, then trade XME.
Feeling good about semiconductors, why not PSI or SOXL?
With a bit of research, you can find ETFs or ETNs on nearly anything you’d care to trade. Some are well-established and highly liquid, while others aren’t as widely traded.
Many are even leveraged to move 2 or 3 times versus the underlying equities.
Let’s keep it simple and focus on the eleven S&P 500 index sectors.
XLP – Consumer Staples
XLV – Health Care
XLK – Technology
XLRE – Real Estate
XLU – Utilities
XLI – Industrials
XLB – Materials
XLE – Energy
XLF – Financials
XLY – Consumer Discretionary
XLC – Communications
Institutional money tends to rotate through these sectors over the year. To get the most from long-term trends, remember this:
Opportunities lie not in where the market is but where it’s going.
Just like in a football, baseball, or soccer, you catch passes by knowing where the ball will be, not where it is at the moment.
Look at this S&P 500 sector relative rotation graph from Stockcharts, and consider XLP.
Notice how each sector sits in one of four categories – leading, weakening, lagging, or improving. Then notice the tail that indicates its movement over the past two weeks.
XLP is in the blue, so consumer staples stocks are improving.
After playing second fiddle to technology, financials, and energy for several months, they’re now gaining momentum. Consumer staples are also seasonally strong in the summer.
Just look at the data.
Over the past 5 years, XLP has closed higher than it opened in July. Had you gotten in early on this trend last year, you’d be sitting on a pile of cash.
See where I’m going?
Those three sectors XLV, XLK, and XLY, are just waiting for their turn to move up again.
You can smell the opportunity there.
Sure they’re currently underperforming. But it’s because it isn’t these sectors’ turn to be on top right now.
This is when you need to get in.
It’s lunacy to believe that powerful companies that sit in those sectors, such NVDA, MSFT, AMZN, SBUX, PFE, and HUM, will stay down for long.
Beginning traders love green.
They’re jumping into the hottest stocks and sectors long after most pros like me are getting out with some incredible gains.
When you’re late to the party, you get the leftovers.
So give sector trading a try. It might just be the style that suits you best.
For much more detailed info on this method, head on over to Rogue Investing’s YouTube Channel and check out my Hood Talk videos!
Next time we’re going to cover a topic that will help you time your entries and exits – the anatomy of pullbacks.
