How to Beat This Ultra Rare Market Condition
Investors seem lost right now.
A week ago, the American Association of Individual Investors (AAII) Sentiment Survey showed the number of investors who were “neutral” on the market hit its highest level in 16 years, jumping above 50%.
That means that more than half of investors surveyed don’t know whether to be bullish or bearish — something that has only happened five times before in the 29 years the weekly survey has been conducted.
I get it; there are a lot of unknowns in the market right now. What will happen with oil prices? When will the Federal Reserve raise rates? Will the U.K. exit the EU? And so on and so on.
But I’d argue that there all also a lot of “knowns” that are being overlooked by the majority of traders — mostly bearish.
After the turbulent start to the year, the market has rallied more than 15% off its February lows. The problem is, the fundamentals don’t support it.
For starters, consider company earnings… or the lack thereof.
The S&P 500 is trading where it was last year, yet earnings for the companies that make up the index are down 10%. Take a look at the divergence between earnings and the S&P 500:
Declining earnings are only the start. If we look at the S&P 500’s valuation, it’s telling a similar story.
Nobel laureate Robert Shiller’s cyclically adjusted price-to-earnings or CAPE, ratio, which takes the price of the S&P 500 and divides it by a 10-year moving average of earnings, adjusted for inflation, is indicating the market’s best days may be behind it.
The CAPE ratio hit a high of 27.5 in May 2007. Today it stands at 26.1.
Despite the decline in company earnings and lofty valuation of the S&P 500, the market is irrationally tranquil, which leads me to believe this is the calm before the storm.
This surprising complacency can be seen in the Volatility S&P 500 (VIX), which has settled back down to year-ago levels.
The VIX tells us how much “fear” or volatility premium is factored into the price of options. When investors believe stocks will go up in an orderly fashion, VIX is low. When investors are nervous and see large, usually bearish moves on the horizon, VIX surges. Currently, we’re seeing the VIX trading back below its long-term average (red line), near where it was in April 2015.
Very low VIX readings are generally a good sign that all the bulls are already in the market. There’s a saying on Wall Street: “When the VIX is low, it’s time to go.” In other words, the smart money is NOT buying here.
I realize I’ve painted a dreary picture, but understand that it doesn’t mean you need to move completely to cash and hunker down.
When investors don’t know which way to turn in the market, their response is often to do nothing. This can result in missing out on big gains in an up market or something much worse in a down market.
The problem is most people just aren’t prepared for today’s vast mixture of market conditions and lack the tools to protect their portfolios, let alone profit.
That’s why I started the Trade of the Week.
Each week, I send readers a different trade opportunity, using a different strategy, specifically suited to fit that week’s market environment.
Since the market is constantly changing, there isn’t a single trading strategy that always works better than others.
For instance, in the first issue, I recommended what I called a “no-brainer” trade to take advantage of the bearish market conditions I outlined above.
I call it a “no-brainer” because the last two times a setup like this crossed my desk, readers generated 62.4% in nine days and 18.5% in one day — good for 2,532% and 6,759% annualized returns.
While the returns can be spectacular, this isn’t meant to be an exclusive, high-priced service. We’re only charging $19 a month. And each week, I’ll send you my top trading idea for that week’s market environment — along with detailed instructions on how to enter and exit the trade.
It’s not too late to get into my first trade if you join today. And if you do, I’ll immediately send you these six reports:
1. Make Money Every Time You Trade
2. Generate an Amazing 50% Income From the Stocks You Own
3. Double Your Money With the Top Alpha Stocks on the Market
4. Turn a 5% Stock Move Into an 80% Gain
5. Make Money Regardless of Whether the Stock Goes Up, Down or Nowhere
6. How to Set Up Your Brokerage Account for Triple-Digit Trading
You can learn more about the Trade of the Week here. Or, if you’re ready to join, follow this link.