Justin’s note: Today, I’m sharing an important message from master trader Jeff Clark, who says most traders are making a huge mistake right now.
Below, Jeff explains how you should view today’s market—and reveals the best-looking, low-risk/high-reward trade to take advantage of…
By Jeff Clark, editor, Market Minute
It never fails.
The more the stock market rallies, the more traders focus on reward instead of risk.
It almost has to work that way. After all, as the stock market moves higher and higher without even a slight pullback, there are fewer and fewer low-risk trades. So anybody who wants to participate needs to ignore the potential risks of overbought conditions and just buy stocks—trusting that the bullish momentum will continue.
That’s been a profitable strategy so far in 2018. The S&P 500 is up 127 points in just 12 trading days. That’s remarkable. We haven’t seen this strong of a start in any year since 1987.
Of course, those of us seasoned enough to remember don’t recall 1987 as the year the stock market posted huge gains in January.
We remember it for the crash in October.
Now, I’m not suggesting that 2018 will play out like 1987. Though there are lots of similarities, it’s still way too early to draw that conclusion. I’ll discuss those similarities if they hold up over the weeks and months to come.
But here’s my point…
Everyone wants to participate in a rising market. It’s hard to sit on the sidelines and watch as just about everyone else is profiting. The pressure is too great.
So, we forget about the overbought conditions. We ignore the possibility that the proverbial rubber band is quite stretched and vulnerable to a snap back. And we buy.
That is almost always a mistake. Sometimes it takes longer than we might want it to, but the rubber band just about always snaps back.
That’s why folks paid $20,000 for a bitcoin in December—even though the price had increased 100% in two weeks. I’m not saying bitcoin won’t be higher a few months or a few years from now. I don’t follow the asset closely enough to comment intelligently on it. What I do know, though, is the risk/reward setup is MUCH better after a 30% decline than after a 100% rise.
Declines are healthy. They relieve the selling pressure. They shake out the “weaker hands” and create a stronger foundation for longer-term gains.
Any asset that goes too far without a sell-off is likely to get pummeled at the first sign of weakness. Everyone who’s anxious to sell—but didn’t do so for fear of missing out on even bigger gains—rushes for the exits. The rapid decline scares away the folks who would normally be willing to buy. And the price hits an air pocket.
That’s when you get a dramatic overnight decline.
If you have cash, then you can take advantage of the move and buy at depressed prices while everyone else is selling.
On the other hand, if you joined the crowd and chased prices higher into overbought conditions, then you’re more likely to be caught in the downdraft… and end up taking a loss on the trade.
In a nutshell, that’s the difference between “momentum” traders and “mean reversion” traders.
I’m a “mean reversion” trader. I view the broad stock market like a rubber band. I hope that it stretches too far in one direction so that I can profit as it snaps back to normal conditions. Those are the types of conditions and the types of trades I look for.
2017 was a momentum market. It was a freight train that only moved in the bullish direction. Momentum traders should have made huge gains. Even so, those of us who trade on the “rubber band principle” still had a few opportunities to profit.
Last year was a HUGE year for momentum traders. The S&P 500 didn’t pull back even 3% for the whole year. So the wind was at their backs.
Those of us who trade based on the mean reversion philosophy had a tougher time. Even so, we had a huge year in the Delta Report, my weekly trading advisory. [You can sign up for it here.] We were profitable on 79% of the trades I recommended in 2017. The annualized return on those trades was over 200%.
And those returns are based on a philosophy that was out of favor last year.
Going into 2018, there are very few sectors that offer lower-risk opportunities to profit. The ONLY sector that looks good to me is precious metals. It’s had a good run higher over the past month. But the sector is so depressed, I think there are much larger gains ahead.
If the stock market keeps pressing higher, then I’m going to keep looking for trades that offer low risk and high reward. If those trades don’t exist, then I’ll tell folks to sit on the sidelines.
I’m happy to underperform the market in the short term. I know the market ALWAYS reverts to the mean. And I’m okay sacrificing short-term gains for the risk of intermediate-term declines.
Precious metals stocks are the best-looking, low-risk/high-reward trade I see in the market right now. The downside to buying mining stocks is minimal while the potential reward is quite substantial. Only time will tell if I’m right or wrong.
But there’s one thing of which I’m certain… If I’m right, my subscribers will see huge profits. If I’m wrong, then the downside should be minimal.
That’s the epitome of a low-risk/high-reward trade. And that’s the only bet I’ll make in the current market environment.
More importantly… it’s the only trade I would recommend for you to make today.
Best regards and good trading,
Editor, Market Minute
Justin’s note: Before I start my trading day, I always check my inbox at 7:30 a.m. ET for Jeff Clark’s Market Minute.
Each day, Jeff has new market insights that always improve my trading performance… like which charts to watch during the week ahead… which technical indicators to use… or just some tried-and-true strategies from his 30-plus years as an option trader.
I asked Jeff if I could share his newsletter with Dispatch readers. And he set up a link you can use to subscribe to the Market Minute with just one click. It’s completely free and should give you the same trading edge I get from reading the Market Minute every day. Click here to get started.
Are you also betting on precious metals today? Have you made any recent trades? Let us know how it’s going right here.
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