Daily Archives: November 8, 2017

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Make Triple-Digit Gains by the End of the Year

Now is a great time of year to be a short-term trader. That’s because seasonal trends are showing buy signals in stock markets around the world.

Seasonal trends are well-known in the United States. In the U.S., traders who follow the advice to “sell in May” know the best six months just started.

However, end-of-year trends exist in markets outside the U.S., too.

Strong Seasonal Trends

Charts show strong seasonal uptrends are beginning in Germany, Sweden and Japan. ETFs allow U.S.-based investors to benefit from these trends.

Now is a great time of year to be a short-term trader. That’s because seasonal trends are showing buy signals in stock markets around the world.

An ETF, or exchange-traded fund, is an investment fund that tracks an index. The manager will buy or sell whatever’s required to deliver the same performance as an index.

To find trades, I looked for seasonal uptrends in charts of global indexes. There were many. But not all trends were up. The chart above in the lower right corner shows a strong downtrend.

The chart in the upper left corner is the seasonal trend in the iShares MSCI Germany ETF (NYSE: EWG). This is an ETF that tracks the DAX Index, a benchmark index for German stocks.

I created a simple trading strategy for this and the other ETFs. If the seasonal trend is up and the ETF is above its 200-day moving average, buy call options on the ETF.

A call option gives the buyer the right, but not the obligation, to buy the ETF at a specified price at any time before the option expires. You won’t have to exercise the option to collect a gain. You could simply close the option with a sell order.

Options offer defined risks. You can never lose more than what you paid for the option. This means risks are small in dollar terms since options usually trade for just a few hundred dollars or less.

or EWG, traders could buy January 18 $33 call options for about $100. This is the right to buy 100 shares of EWG at $33 any time before January 18. If EWG trades at $35 before the end of the year, gaining about 6%, this option will deliver a gain of at least 100%.

So, the risk is $100, and the possible gain is more than $100 on the trade. But how likely is it that EWG will gain 6%?

Well, in the past 20 years, EWG gained an average of 9.5% in the last two months of the year. Of the 12 trade signals, 11 were winners (91.7%).

Larger Potential Returns

The iShares MSCI Sweden Capped ETF (NYSE: EWD) is also a reliable trade. Call options expiring in March offer a way to benefit from this trend. In the past 20 years, there were 11 buy signals and 10 winners (90.9%). On average, EWD gained 8.2% in the last two months of the year.

There’s another strong seasonal trend in Japan. Here, the WisdomTree Japan Hedged Equity ETF (NYSE: DXJ) is the best ETF to use. This ETF hedges currency risks and closely duplicates the performance of stocks in Japan.

DXJ gave just four buy signals over the past 10 years, but each one was a winner. The average gain was 8.2%.

There are also some downtrends at this time of year. You can see the iShares JPMorgan U.S. Dollar Emerging Markets Bond ETF (NYSE: EMB) in the chart above in the lower right corner. This ETF has a strong downtrend, falling more than 80% in the last two months of the year.

Put options allow us to benefit from downtrends. They increase in value when a stock or ETF declines in value. Puts also have limited risk, sell for a few hundred dollars or less and offer larger potential returns in percentage terms.

A January put option in EMB offers exposure to the ETF’s expected downtrend.

To learn more about using options to turbocharge your portfolio, you can watch the special video presentation for my Peak Velocity Trader service.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

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ETF

Here’s Why This ETF Has Become Popular with Retirement Investors

One of the biggest changes to investing in recent times is the vast amount of choices available to investors of any size. The advent of ETFs has opened up markets and assets which almost no one could previously access – especially if you didn’t have a lot of money to invest.

It used to be you could invest in individual stocks, bonds, or mutual funds. Now, through ETFs, you can invest in everything from palladium to Thailand to foreign junk bonds. There are multiple ETFs available for a variety of strategies and investing philosophies as well (value, growth, income, etc.). Plus, these funds are available to just about anyone with a brokerage account.

The popularity of ETFs has also shined a light on asset class investing as a primary means of long-term/retirement strategies. Instead of just buying stock and bonds, many portfolios now are diversified into 10 to 15 (or more) asset classes, such as foreign government bonds, REITs, and commodities.

One of the most popular asset classes to invest in over the last decade has been emerging markets. This class includes countries like China, India, and Brazil. They tend to be countries which can experience high growth but also high risk (with China being the perfect example).

Related: 2 Stocks to Buy for the Death of the Combustion Engine

With major US indexes at or near all-time highs, and valuations reaching very frothy levels, investors may be turning to emerging markets for growth in the final weeks of the year. In fact, iShares MSCI Emerging Market ETF (NYSE: EEM) is seeing some massive bullish activity in its options. EEM is the most popular emerging market fund and one of the most popular ETFs period.

This past week, a trader made a gigantic bullish bet in EEM options expiring on December 15th. This three-way trade involved buying a call spread and partially financing it by selling puts. (By the way, that’s one of my favorite options strategies, but you have to a sizeable margin account to do it because of the naked short puts.)

With EEM at $46.75, the trader purchased the December 15th 47-48.50 call spread 102,000 times, while simultaneously selling 102,000 of the 44.5 puts in the same expiration. Normally, the call spread would cost $0.58, but selling the puts for $0.33 brought the total spread cost down to $0.25.

With a total cost of $0.25, the breakeven point for the trade is $47.25 and max gain is at $48.50. The dollar gain at $48.50 would be a whopping $12.75 million. On the flip side, if EEM closes below $47 on December 15th, the trade would cost $2.55 million (in premium spent) down to $44.50. Below $44.50, the loss potential rises as the price goes lower.

Of course, EEM isn’t an especially volatile ETF, so the chance of it plunging below $44.50 in the next 6 weeks is extremely low. Still, this is clearly a lot of money to bet on EEM going up. Losing $2.5 million if the ETF does nothing between now and then is a real possibility.

The trader likely believes investors will be looking at emerging markets to close out the year. Perhaps some in the investment community believe the US and other developed nations have peaked for the year.

Regardless, if you like the idea of taking a low risk bet on EEM, you can simply replicate the call spread portion of the trade. Since most investors won’t be trading 100,000-lots, paying $0.58 for $0.92 in upside is a perfectly reasonable thing to do.

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