Political tensions rose over the weekend, as Iran admitted it lied and “mistakenly” shot down a Ukrainian passenger jet… yet, futures were trading higher early this morning. Talk about a wacky market.
Since when did political tensions not matter, especially when we’re looking at a potential war. Not only that, but it seems as if traders have been too complacent… and that’s when things could take a turn for the worse.
This week, we’ve got a slew of catalysts:
In this market environment, I don’t think it makes sense to go out on a limb — whether you’re bullish or bearish. Instead, I think it’s a good idea to remain patient and look for signals that tell us where the market could be headed.
I don’t know about you… but I don’t want to be long any stocks related to the overall market because I don’t want to wake up with knots in my stomach and staring at a gap down. Instead, I’m going to stick with what’s working for me — small-cap momentum stocks.
For the most part, we’re seeing proof that small-cap momentum patterns are working…
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So why does trading small-cap stocks work so darn well in this environment, and any market environment for that matter?
On any given day, small-cap momentum stocks dominate the leader board. Just take a look at Friday’s action for some small caps…
The reason I love to trade these stocks is that they move… and if you have the right patterns, you can spot some massive winners. Not only that, but these stocks don’t care what the overall market does.
Think about it like this… small-cap stocks have market capitalizations between $300M and $2B. It’s very unlikely a market headline will affect them. Quite simply, they move to the beat of their own drum.
So when the direction of the overall market isn’t clear, I love to pounce on these momentum stocks. You see, over the years, I’ve figured out that my patterns work extremely well.
I think the best way for you to understand how to trade in a foggy market is to go over a real-money case study… and I’ll show you one of my favorite setups — the fish hook pattern.
I alerted my clients about a potential January effect play in Overstock.com Inc (OSTK).
Of course, I let my Jason Bond Picks clients know I was keeping an eye on this stock. It was one of my favorite stocks, and it played into the January effect thesis.
Stocks I’m looking to buy soon for January effect are OSTK and I, hopefully in the middle $6’s on both. No rush for new positions since the market is likely to see some selling early this week. Swing trades with hold times ranging from a few days to a few weeks is what you should expect here.
If you look at the daily chart in OSTK… the stock got smoked from September all the way until late December. When a small-cap stock gets destroyed like that… it’s when I love to look for my fish hook pattern.
So we had a few things going for the stock… the January effect thesis… and it found some support and started to catch a bounce.
Here’s what I look for with my fish hook pattern.
The stock experiences a massive drop
The stock finds support and holds, it’s what I call an area of value.
The stock to catch a small bounce.
Take a look at the chart in OSTK above and be mindful of the fish hook pattern conditions. That looks like a textbook setup to me.
However, I was a little late to the party… I got in OSTK after it caught a massive bounce last week.
Of course, I was chasing a little because I was stubborn the other day… but I’m not mad about it. In fact, the move higher was actually confirmation OSTK could run higher.
Sure, I didn’t get the price I wanted… but I didn’t miss out on the trade. Since I did chase, I wasn’t looking for a massive winner, just 5-10%. However, at the time, I figured OSTK had massive upside potential, and it could’ve been good for a 20%+ winner.
Here’s a look at what happened with OSTK.
Not too long after, OSTK started to ramp higher… and one day, it hit a high of $8.83… and I sold into the momentum.
Just by focusing on small-cap stocks, I locked in about 10% overnight, a $9,000 profit overnight!
Of course, I took some profits off the table and tried to juice a little more out of the trade. But I wasn’t going to just leave it on without protecting my profits.
So for the rest of my position, I actually put a stop-market order.
Well, my order got hit at $8.50 on the remaining shares, so I still came out on top with about a 10% winner overall.
That was good for approximately $12,000 overnight!
Right now, I don’t think it’s a great time to be solely focused on the overall market… especially when small-cap stocks are rocking.
If you want some clarity, then check out how I’m able to use simple patterns to uncover massive winners in the small-cap market.
If you’re new to investing, you’ve probably heard a lot of jargon thrown around. But even if you’ve been trading on the markets for a while now, it can be difficult to keep track of the investment landscape.
There are many types of investments out there. While some investors focus on a couple kinds of securities, the best, most-diversified investment portfolios usually encompass different types of securities.
Types of investments include:
In this article, we’ll describe each of these types of investments. Read on to learn about the securities you should be thinking about to build a diversified investment portfolio today.
Stocks, or shares, are an investment in a company. In other words, when you buy shares of a company, or equity shares, you’re buying a small piece of the company itself. Companies sell shares to raise cash to invest in capital or grow their business. Investors can buy and sell stocks among themselves.
Investors in stock make money when the value of the stock they hold goes up and they sell it to other investors for a profit. Stocks are riskier than other kinds of securities, such as bonds or certificates of deposit, but they have the potential for higher yields.
There are two basic types of stocks. Common stock is the type all publicly traded companies issue. Owners of common stock share in the company’s successes, because the value of the stock goes up (or down) depending on how the company is faring. The company might pay dividends — a portion of profits that it distributes to its investors on a regular basis — but is not required to do so.
The second basic kind of stock is preferred stocks. Preferred stocks usually come with guaranteed, fixed dividend payments. Preferred stock dividends are paid out before common stockholders receive dividends. For this reason, preferred stock tends to be less risky than common stock, but the potential for returns is lower. While preferred stocks don’t lose as much value as common stocks during market downturns, they don’t gain as much during periods of market growth, either.
Within these two broad categories are a number of other stocks. You might also hear about penny stocks. Penny stocks, according to the U.S. Securities and Exchange Commission (SEC), are stocks issued by small companies that trade at under $5 per share. Investors like penny stocks because you can pick them up cheap, without investing a lot of capital. So if a small company takes off, you’re positioned to make a lot of cash. Penny stocks are also much riskier for this reason.
You must purchase stock through a broker. You can work with a broker in person or through an online brokerage firm to buy and sell stock.
A bond is different than a stock. A bond is basically a loan you, as an investor, make to a company or another entity, such as a local or federal government. When you purchase a bond, you do not get an ownership share in the entity; rather, you are giving the bond issuer cash to use for their own purposes. In exchange, they pay back the underlying investment with interest.
Like any other type of security, investing in bonds has its tradeoffs. Traders usually consider bonds less risky investments than stocks, but they also tend to offer lower returns. As with any kind of loan, the issuer could default, meaning the investor is out of luck. Bonds issued by the U.S. government are the safest options, followed by those issued by city and state governments. Bonds issued by corporations are slightly riskier.
The rule of thumb is the riskier a bond, the higher the interest rate an investor will receive. The higher interest rate is designed to compensate the investor for making a riskier bet.
Bonds are fixed-income investments. That means bondholders receive regular interest payments, often once or twice per year. Additionally, the total principal is paid off after the bond’s maturity date.
Options are slightly more complicated. They are a contract that gives the holder the option to either buy or sell a stock at a set price, known as a strike price, by a certain date. Options offer more flexibility than other kinds of investments since, as the name implies, they give the holder the option to execute a purchase or sale. Buying an option means buying a contract, not the underlying stock.
Options can be more or less complex, depending on the type. At a basic level, however, buying an option means locking in the price of a stock in the future. For example, if you expect the price of a stock to go up, you can buy an option and eventually benefit from purchasing the stock at a lower price than the going rate. If your bet is wrong, you’re still only out the price of the option, since you haven’t purchased or sold the underlying stock.
There are two basic kinds of options: put options and call options. A put option gives the holder the right to sell the stock, while a call option gives him or her the right to buy a stock. When you purchase call options, you are taking a long position on the market. The investor selling that option, called a writer, is taking a short position.
Plenty of investors love the thrill of picking stock, doing their research, and scoring big. But other investors just want a low-risk stream of income to save over the long-term, often for retirement. Mutual funds are great options for this type of investor.
Mutual funds let investors buy a large number of investments in one transaction. Mutual funds pool money from many investors. A professional manager then decides how to invest that money in stocks, bonds, and other assets to yield a reasonable return for the investors.
Each mutual fund tends to follow a set strategy. Some funds invest in both stocks and bonds, for example, while others might focus on a particular type of each investment, such as international stocks or government-issued bonds. The investments the manager makes determine that mutual fund’s risk level.
When the mutual fund earns money, that profit gets distributed proportionally to its investors. Investors pay an annual fee, called an expense ratio, to invest in a mutual fund. Mutual funds carry similar risks to investing in stocks, but because most mutual funds consist of a diversified portfolio, they are typically less risky than trading individual stocks.
Index funds are types of mutual funds. Rather than paying a manager to choose investments, index funds passively track a particular index. For example, an S&P 500 index fund would track the performance of the S&P 500 itself by holding stock of the companies that fall under that index.
Because index funds don’t require a manager to track investments and make trades, they are usually cheaper to invest in. The risk associated with the investment depends on the investments the index fund holds.
The interest and dividends earned by index funds are distributed to investors. The value of the fund itself can also go up and down, and investors can sell their shares in a fund. Like other mutual funds, index funds charge an expense ratio, but it’s lower than an actively managed mutual fund.
Exchange-traded funds, or ETFs, are specific types of index fund. Like index funds, ETFs track a particular index and tend to be less expensive than mutual funds because they do not require active management.
However, unlike index funds, ETFs get traded on an exchange like a stock, which means you can trade ETFs throughout the day, much like stocks. Mutual funds and index funds, on the other hand, are only priced at the end of each trading day, so it makes less sense to buy and sell them throughout the day.
New traders often start with ETFs because they tend to be more diversified than individual stocks. Like with mutual and index funds, investors make money from ETFs when their value goes up and you can sell them for a profit. ETFs also sometimes pay out dividends and interest to investors.
Certificates of deposit, or CDs, are very low-risk, easy investments. They’re basically one step up from a typical savings account you might open at a bank. When you invest in a CD, you give the bank a certain amount of money and promise to leave it there for a set period. In exchange, at the end of the loan period, the bank promises to pay you the principal plus a predetermined amount of interest.
CDs are FDIC-insured up to $250,000, so they are relatively risk-free. However, you will pay a large penalty if you withdraw your money before the end of the CD’s term.
To learn more about the types of investments available, sign up for a free training session with one of RagingBull’s trainers today.
Well, it’s been a roller coaster ride of a market with twists, turns, and several bumps along the way. Making money in this market environment has been a challenge for many traders… to say the least.
On any given day, a tweet from the President… a headline about political tensions rising… trade war news… or even an announcement from the Federal Reserve Bank… has the power to stop the market on a dime… and reverse its course.
Heck, headlines came out this weekend about how Iran completely lied about shooting down the Boeing jetliner… and we could be waking up to a potential gap down come tomorrow morning.
It’s very easy to get caught up in the noise in such a heavy news-driven stock market…
So how can we still prosper and profit in such an unstable environment?
Focus on what the charts are saying… and keep a keen eye on the price action.
I know, I know… Jason, The market is near all-time highs… how could you possibly say the market is unstable?
Hear me out.
Everyone and their brother are trying to get into the market… and they generally do so through index funds. You’ve probably heard of BlackRock, Vanguard, and State Street before, right?
Well, a lot of investors place their money in the market via passively managed funds, and they pay a small fee to have someone “manage” their money. It’s simple and easy for the everyday investor. However, it doesn’t get you anywhere, especially if you’re paying the volatility tax.
Think about it like this, BlackRock has approximately $7 trillion in assets under management (AUM), while Vanguard comes in at $5.6 trillion and State Street with $2.9 trillion. Combined, these three behemoths control about 80% of all the money in index funds.
Get this, more than 20% of the shares of a typical S&P 500 company is held in their portfolios… and the “Big Three” owns nearly 20% of Apple Inc (AAPL). Heck, they also have some hefty holdings in the world’s largest banks.
When you think about it, the SPDR S&P 500 ETF Trust (SPY) finished 2019 up a whopping 31%… and at some point, you’ve got to wonder when will the profit-taking happen?
Very soon, I think… as we may see some outflows in the index funds after the remarkable year it’s had. If that does happen, there may be a flood of sellers trying to take profits… and I could see panic ensue, and traders potentially dumping a bulk of their holdings.
Right now, the charts are telling me to be careful and brace myself for the next leg down. Just take a look at the daily chart in SPY.
On Friday, SPY hit the upper Bollinger Band range and pulled back. Typically, when a stock or ETF reaches that level, it’s a sign it could mean revert and fall to a key support level. Not only that but if you look to the RSI, the SPY is very close to overbought levels.
When you take a look at high beta names, such as Apple Inc. (AAPL) and Tesla (TSLA)… it’s the same story.
They’ve both reached extreme levels… and are extremely overbought.
Of course, one of the major smoke signals in this market right now is the political tensions between U.S. and Iran. That could shake things up for the overall market, and overvalued stocks. However, that may all get overshadowed by every trader’s favorite season: earnings season.
Corporate earnings season is set to kick off this week with JP Morgan Chase (JPM) reporting this Tuesday. Traders will be watching closely as they look for clues as to how the banking industry is faring.
Of course, many have been betting on global growth picking up this year… after the U.S. and China “trade truce”. However, what happens if corporations actually come out and report bad earnings for Q4 2019?
Well, we could be looking at a potential correction.
Of course, I won’t be going out on a limb here and randomly shorting stocks. I’ll be following them closely and waiting for the right time to pounce, and I’ll be waiting until I see the smoke signals pop up.