By: Costas Bocelli — January 2, 2020
How to Trade This Sky-High Market For Pennies on the Dollar
It’s a New Year. It’s a new decade!
The bulls are ringing in the New Year on a high note.
It was a strong year for stocks in 2019.
The S&P 500 rose +28.9% for the year and added a record $5.9 trillion in value.
That’s the best gain for the large-cap index in six years!
(Click on any image to enlarge)
All eleven broad sectors that comprise the U.S. stock market finished in the black led by the Technology sector which gained +47.9%.
The Energy sector underperformed and was the only broad sector not to post a double-digit return in 2019 (+4.7%)
.Now that the calendar has flipped to 2020, not much has changed in terms of the relative standing for Domestic Equities.
It remains atop our Broad Asset Class long-term relative strength rankings (International Equities is ranked second)
And Technology, Industrials and Financials remain the top three favored sectors in terms of long-term broad sector relative strength rankings.
When there’s any significant change, we’ll be sure to let you know in future columns of True Market Insider.
But until then, running plays from the existing playbook offers you the best odds of generating outperformance and growing wealth at a faster pace.
That means overweighting Domestic Equities with a focus on securities that reside in the strongest sectors such as Technology, Industrials and Financials.
This is where we find demand in control and positive relative strength (outperformance).
Now here’s the thing about U.S Equities as we enter the New Year.
The stock market has been on a strong run since it broke out to new highs in early October.
A breakthrough in trade with China, dovish Fed actions and improving economic data have all contributed to a +9% rise in the fourth quarter for the S&P 500.
The S&P 500 collected its 34th all-time record closing high for 2019 at the end of December, and with it, an overbought trading condition has emerged as we begin 2020.
For sure, many of the shorter-term technical momentum indicators, such as the RSI, are flashing “overbought”.
We can see another indication of an overbought/oversold condition by observing the percentage of stocks in a universe that are trading above their respective 10-Week (50-day) moving average.
Currently we find nearly 80% (four out of five stocks) of stocks within the S&P 500 trading above their 50-day moving average which is excessive. (Typically, when the reading rises above 70% is considered to be short-term overbought.)
So we’re in an overbought stock market landscape. Is the risk of a pullback elevated?
But remember: "overbought doesn't mean over." Just because the stock market is overbought, it doesn’t necessarily mean that rally must end just yet.
Take 2017 as an example. The S&P 500 gained +19.4% and the market was overbought heading into 2018.
What followed was another massive leg higher in the rally that persisted throughout the entire month of January.
The S&P 500 gained another +7.2% before topping out at the end of the month.
Of course, we know what happened after that -- the bottom fell out! The S&P 500 suffered its fastest correction since the great depression! It took just nine trading days for the index to decline by ten percent.
Will things play out in a similar fashion this year? No one can know for sure.
But what we do know is that we have price to serve as our guide.
There are also seasonal forces at play that give the bulls the edge over the medium to longer-term.
So while the short-term may be overbought, any near-term weakness should be viewed as an opportunity to buy and accumulate bullish positions.
In Profit Skimmer, my options trading service, we’re doing exactly that.
I recently issued a bullish trade recommendation in Amazon (AMZN).
The stock recently broke out of a trading channel, quickly popping g up to $1,900 per share. It then pulled back to around $1,850 which opened the door to buying into a bullish position.
I think the stock moves higher from here with the upcoming earnings event at the end of the January as the catalyst.
But the thing about AMZN is that it’s trading around $1,850 per share. So to take a 100 share round lot position would have you commit $185,000 in capital.
For many individual investors, that’s out of reach. But not for Profit Skimmer subscribers.
There's a smarter and better way to make a directional trade in an underlying stock. Just use options. Specifically, an options strategy called a vertical spread.
I use spreads almost exclusively for the trade recommendations in Profit Skimmer. That's because the vertical spread gives you many advantages over trading directly in the underlying stock, such as:
- Cost efficiency and high returns on capital...
- Ability to take bullish and bearish positions in an IRA...
- Limited risk and fully hedged positions.
The vertical spread can even prevent you from getting “whipped” or tricked into bailing too soon on a stock that, had you waited, would ultimately have turned into a winner.
So it’s the perfect trading vehicle for a stock like AMZN.
In fact, the vertical spread trade I recommended only risks a tiny fraction of what you’d otherwise have to spend to buy the stock.
Instead of $185,000 for a 100 share stock position, the Call spread would only require a $2,200. That's just 1.2% of what the stock buyer would have to pay.
You can literally get in on AMZN for pennies on the dollar. It’s also your maximum risk in the trade – what you pay for the spread.
And if the trade happens to work out, it has a potential to generate a triple-digit profit return!
Now how awesome is that!
Of course I can’t give any of the specifics on the AMZN recommendation because that would be unfair to my paid subscribers.
But it’s not too late to get in on the action either.
On Thursday, January 9th, we’re opening the doors to a select number of new Profit Skimmer subscribers.
To learn more about my highly effective trading strategy, the seasonal forces at play that will drive the markets in 2020 and how you can get my latest trade recommendation in AMZN, click here now.
Cheers to a Healthy and Prosperous New Year!