One simple trick that investors don’t usually get to benefit from is the use of relative strengths in sectors. Investors try to find a good stock and hold it forever, but in times like we are having now, that gets very painful.
Especially if you are holding stocks in the worst sector out there. But to traders, even bad news is good news.
Investors made their decision awhile ago and now they must figure out how to live with it. Traders, on the other hand, can simply make bullish plays on stocks in the strong sectors and make bearish plays on stocks in the weak sectors.
That’s why I showed this chart in the room today: the sector skittles chart. It shows the best and the worst sectors out there.
There is a VERY big difference between the top and the bottom of this chart right now. You cannot afford to be unaware of the difference.
The worst sectors, Biotech and Retail, may hold the very best opportunities right now. Just like the ANF trade I broke down for you yesterday.
This kind of trade doesn’t come along often, but when it does, you just want to tell someone about it!
What were your profits like on the latest smash we had with ANF?
Forgive me for doing this so much but to be honest this has been happening more frequently than I expected lately.
That’s because this market continues to trade to the lower creating some amazing possibilities for those who anticipated it. The simple reason is that markets fall faster than they rise, and it creates monster trades for those who positioned themselves properly.
Investors never plan to sell. They plan to hold as long as the price of their stock keeps trending higher-something they assume will continue for years in the future.
When the price action gets so bad, eventually they decide they can’t hold on forever. But even then they don’t sell until they hear news that confirms the idea that they simply MUST get out of the stock.
When Abercrombie and Fitch (ANF) released its quarterly report yesterday, most investors expected that the news would be good, or at least okay enough to help them stay in the stock. If they had expected the news to be bad, they would have already sold.
Those investors expected that the company would still be making money, even if not as much as hoped. What they did not expect was that the company would report they had been losing money.
But when company officials reported that sales beat expectations, but the company not only didn’t make profit estimates, they had a considerable sized loss, it triggered a scary looking selloff. The stock opened 33% lower than it closed the day before.
That meant that the 32-strike put options I had purchased were not just producing a little profit. They were generating monstrous profits!
Quantitative Specialist, Penny Hawk
May 25 2022