By Tom Dyson, co-founder, Palm Beach Research Group
Read this carefully. There is money in today’s essay.
I’ve found a great low-risk, high-reward trading opportunity.
By low-risk, I mean we stand to lose about 2% of our money if I’m wrong.
By high-reward, we stand to make about 10% on our money if I’m right.
I think there’s a greater than 50% chance that I’m right. Maybe even greater than 60%. We should know the result in a couple of weeks.
If it works, we’ll exit right away and take our 10% gain. If not, we’ll cut our losses at 2%.
In other words, this is a cheap opportunity for us to roll the dice… and make some money.
I want you to open your brokerage account and buy stock in DXD.
DXD is an ETF.
It is an “ultrashort” of the Dow Jones Industrial Average (DJIA).
The DJIA—also known as the “Dow”—is probably the most famous stock market index on the planet. Turn on CNN or CNBC. You’ll see its level in the bottom left-hand corner of the screen. Right now, it’s around 19,900.
“Ultrashort” means DXD is the double inverse of the DJIA. So if the DJIA falls a percent, DXD rises TWO percent. And if the Dow rises a percent, DXD falls TWO percent.
In other words, when you buy DXD, you’re hoping the Dow Jones Industrial Average FALLS.
This is why it’s called an “ultrashort.”
Why do I think the DJIA is going to fall?
This has nothing to do with inflation, interest rates, debt levels, or Trump’s election.
It has to do with resistance.
Between November 4 and December 13, the DJIA charged higher. It rose 2,070 points—more than 10%—in 26 trading sessions.
You can think of this relentless five-week rise as an advancing army.
Then it hit enemy resistance. That resistance is the 20,000 level on the DJIA—a big, round number. You can think of the 20,000 level like a line of defensive fortifications on the battlefield.
Right now, there’s a heavy battle taking place between bulls and bears.
In the last month, the Dow has made six attempts to reach 20,000 and the bears have pushed it back six times. In one spirited assault, the DJIA got as high as 19,999.65. Then the resistance pushed it back…
One of two things will happen now…
Either the bulls will breach the defenses and overrun the whole fortification. The DJIA will soar like a marauding army sweeping across undefended territory…
Or the bears’ fortification will hold up, and after a long, hard-fought battle, the bulls will retreat with their tails between their legs.
This sets us up for a very profitable, low-risk trade.
We buy the ETF I just mentioned… DXD.
If the Dow breaks through the 20,000 level, we sell immediately. We cut and run like cowards. We’ll lose 2% of our money, at most.
(We might even buy DDM at that point, the ultralong ETF that tracks the DJIA.)
Otherwise, we hold.
Maybe there’ll be some bad economic news. Or a war will start. Or Trump will make a mistake. Or the Fed will do something stupid. Who knows?
It doesn’t matter. The DJIA could easily and quickly fall 1,000 points (5%).
The point is, because of the massive resistance line at 20,000, we get a cheap roll of the dice that the DJIA falls.
If we’re right, we’ll make as much as a 10% profit. If we’re wrong, we’ll only lose a maximum 2%.
Another ominous sign for U.S. stocks…
The S&P 500’s price-to-EBITDA ratio just hit a 30-year high. It hasn’t been this high since the 2000 tech bubble.
[EBITDA is earnings before interest, taxes, depreciation, and amortization. EBITDA is the amount of cash a company’s operations earn. The price-to-EBITDA ratio is similar to the more popular price-earnings (P/E) ratio. But some investors prefer EBITDA because it’s harder to manipulate.]
The chart below tracks the ratio. As you can see, it’s climbed to 11.3… 53% higher than average.
U.S. large-cap companies have never been this expensive when compared to their cash earnings. That’s another sign to beware of stocks…
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From DeVere B.: I live in Washington and I’ve purchased a couple of tax deeds in two smaller counties in the state. My experience has been that at the auction, any properties of value get bid up pretty high. Any leftovers tend to be non-desirable pieces of land. I’m interested in hearing more on the subject. Based on my experience, the opportunities seem to be limited.
Editor’s Reply: Properties can get bid up pretty high in populated counties and at crowded auctions. That’s not always the case in less metropolitan areas. For example, there are great deals to be had in rural and suburban counties. Investors could also pool their resources in a partnership to buy properties that may get bid up. Bottom line: Don’t view auctioned properties as speculations. It’s best to think of them as investments. Thanks for your note.
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