Ride your winners to the market crests… book some gains… and buy on the pullback.
That’s been our winning game plan for the past three months.
You can’t go wrong with that strategy. We implemented it before the market bottomed in March. And since then, the market has rallied about 40%.
In my Palm Beach Trader service, we’ve done even better. For instance, we picked up Veeva Systems in March. And it’s up about 95% since then – more than doubling the broad market.
To win in an overheated market like we’re in now, all you need to do is be patient and wait for prices to come to you…
But some investors are more aggressive. And they’re willing to take on a bit more risk if the rewards are higher.
If that’s you, in today’s essay, I’ll share two different – albeit riskier – strategies to profit from this overbought market…
Before you adopt any strategy, you need to know what’s going on in the battlefield. Our battlefield is the market.
My “unbeatable” stock-picking system is like military reconnaissance. It gives us the intelligence we need to win in the markets.
Remember, it scans nearly 5,500 stocks each day. It uses algorithms to rank each one for strength.
But my system does more than just look at individual stocks. It also looks at the big-money buying and selling in the broad market through its Big-Money Index (BMI).
And here’s what its data looks like right now…
Now, when the index level dips to 25% (the green line in the chart) or lower, sellers have taken the reins, leading the markets into oversold territory. And when it hits 80% (the red line) or more, it means buyers are in control and markets are overbought.
As you can see in the red circle on the chart, the BMI peaked again on June 22… and it’s now trending down. That means sellers are starting to take control again… and a pullback is likely.
Of course, we can’t predict when it’ll happen. It can happen tomorrow or next month…
But what goes up, eventually comes down. And we have two simple ways to play it…
Two Ways to Bet Against the Market
I dug through the data, and we’re seeing buying slowing or plateauing in nearly every sector of the market: Materials, industrials, and even technology…
But there’s one sector showing significant slowing: Healthcare.
The chart below shows the Health Care Select Sector SPDR Fund (XLV)…
As you can see above, after each major peak, XLV has come crashing down again. And my system shows XLV just peaked again.
So there’s much more downside risk in this sector.
The simplest thing you can do is avoid XLV until it pulls back. Then buy in at a discount.
But more aggressive traders can short XLV. You can do that by either buying a put option on XLV or buying an inverse exchange-traded fund (ETF) like ProShares UltraShort Health Care (RXD).
RXD is a leveraged ETF. So it rises at twice the rate as XLV falls. But it also falls at twice the rate as XLV rises. So make sure you position-size half its normal size.
Now, shorting stocks is much riskier than buying them outright. Losses can be significant. And options can expire worthless.
But the gains can be much bigger – and come much faster – as well.
So if you want to make a small speculative bet against the market, the data confirms more downside ahead for XLV.
Just make sure to position-size appropriately and tighten stops on any shorts. And always remember: Never bet more than you can afford to lose.
Patience and process!
Editor, Palm Beach Insider
P.S. To know where the market’s headed, you have to follow the big money. It’ll show you the way to profits, even through volatile conditions.
It pinpoints the best stocks that’ll rocket higher. In fact, it’s already identified several winners for my Palm Beach Trader subscribers – including triple-digit winners like The Trade Desk, Paycom Software, Nvidia, and SolarEdge Technologies.
So don’t miss out on the next wave of big-money gains. You can join us right here.