As we approach the New Year, markets are (mostly) reveling in the festive spirit, following the seasonal trend known as the Santa Claus Rally. However, most people I know find it scary to buy a stock when it’s at its all-time high… which is where many stocks are these days.
Facebook… Amazon… Apple… Netflix… Google… and, yes, Bitcoin…
They’re all trading at or near their all-time highs.
They are, indeed, “scary buys.”
But here’s the thing…
There ARE ways to find good buys, even in this environment. You’ve just got to use the right strategy. That is… Momentum!
Momentum strategies exploit the tendency for new all-time highs to beget even higher new all-time highs.
You don’t have to buy stocks at their all-time highs to exploit the momentum factor.
And you don’t have to pick the market’s “hottest” stocks of the day (i.e. the FAANGs) to make big money on momentum moves.
Look, I get it… psychologically, it’s extremely difficult to enjoy buying a stock or ETF after it’s hit a new high. You feel like you’re late… like the “easy” gains have already been had… like you missed out on “buying low.”
But you don’t get paid to feel comfortable as an investor.
In fact, more often than not, the scariest trades end up being the most profitable ones.
So, don’t avoid buying an investment just because it’s close to its highs, even if doing so feels awkward. You aren’t “shopping” for a new car, so buying near the highs doesn’t mean you’re getting a bad deal.
Let’s take a look at the principles of momentum in action, by way of actual trades I recommended to my Cycle 9 Alert subscribers this year.
I ran my Cycle 9 Alert algorithm on a basket of 50 equity market ETFs, going back 20 years.
I found that Cycle 9 signals were most accurate when the ETF was trading between 0% and 20% from its five-year high. An impressive 70% of these types of trades were profitable, generating an average return of 2.9% in three months. (Note: We use options in Cycle 9 Alert and our average profit since inception is 45% per trade).
That’s proof that buying near the highs is not a loser’s strategy… it’s “classic momentum,” a winner’s strategy.
That said, you do have other options…
Finding “Zone 2” Opportunities
Let’s look at it this way…
According to how far off its five-year high a stock or ETF is, you could aim to make Cycle 9-style momentum trades in any of five “zones,” as outlined here:
Momentum “works” in each and every one of these zones, but there are trade-offs between accuracy and potency (as the next table shows).
Cycle 9 signals produced on Zone 1 investments are the most accurate (with a 70% win-rate). And the win-rate decreases as you go from Zone 1 to Zone 5.
But when you look at average profit per trade, you’ll see a steady increase in profit potency as you go from Zone 1 to Zone 5.
Take a look…
Note that Zone 5 opportunities – where an ETF is more than 80% below its five-year high – are extremely rare, which is why there is no win-rate or average profit in the table.
What’s all this mean?
Well, it just means you have options.
You don’t have to limit your momentum trades only to stocks and ETFs that are trading near their highs (Zone 1).
You could just as easily apply my sector-rotation momentum strategy to Zone 2 opportunities, or, of course, Zone 3 or Zone 4 (when they occasionally present themselves).
And, in fact, that’s exactly what I’ve done with my Cycle 9’ers this year.
We’ve capitalized on a number of profitable Zone 2 opportunities.
Take a look…
Note: Profit calculations are the average of multiple entries/exits.
As you can see, we’ve earned handsome profits on both Zone 1 and Zone 2 opportunities.
Interestingly, Zone 2 trades have been more than twice as lucrative as Zone 1 trades.
Of course, we’ve also had a few losing trades this year. But the winners have more than made up for the small handful of losers. All told, our average trade has netted us 82% in 2017.
We’ve made good profits this year by finding under-the-radar opportunities – off the all-time highs list and outside the FAANGs herd.
A Final Observation
Lastly, I’ve found it quite interesting that, in a year dominated by fervor over the FAANGs and Bitcoin, we’ve made really good money trading “boring” ETFs.
I think it’s a devastating misconception that you have to find the “next hot stock” if you want to double your money, or better.
Why not trade diversified ETFs… using a proven momentum system… with a reasonable amount of leverage (via options)?
My Cycle 9 approach may not be as sexy as buying the FAANGs.
But it works!
And I guarantee you… my momentum strategy will outlast any passing fad.
Whether you muster the courage to make “scary buys” in Zone 1, or find value in down-but-not-out Zone 2’s, a time-tested momentum strategy like Cycle 9 Alert can help you harvest market-beating gains in any environment.
To good profits,
Editor, Cycle 9 Alert