How "Sticky" Markets Beat Stock Pickers

The stock market is a sticky mess right now.

And I have some news for you: Sticky markets are not good for stock pickers.

You see, stocks are glued together in a tight ball right now. When the major averages are up, most stocks are up. And when they’re down, most stocks follow suit. The market’s all gummed up. And speculators with itchy trigger fingers are yanking stocks higher one day—and lower the next.

Of course, a market where all stocks essentially move together is lousy for patient traders. So few opportunities…

In this market, traders are corralling stocks into green pens one day, and red pens the next. That’s a dramatic change from just a couple of months ago…

Earlier this year I crammed our “winners and losers” market theme down your throat. But now, that strategy is history. Thanks to a highly correlated market, it’s getting pretty darn difficult to find standouts.

Let’s check on the scorecard right now:

Halfway through the year, 2015’s big market theme ‘round these parts was winners and losers. When it came to the biggest and most visible stocks on the market, half of them were coming up aces. And the other half were coming up snake eyes.

On July 1st, exactly half of the Dow Jones Industrial Average components—that’s 15 stocks— were positive on the year. The other half were down, so the winners and losers balanced each other out perfectly. The Dow was just slightly in the red for the year. So if you sought out the strongest of these stocks, you found yourself sitting on some sweet gains (that’s what we were doing most of the year).

Don’t get me wrong—when it comes to trading, scooping up the strongest stocks on the market is usually a good idea. But now, there are virtually no standouts to be found as the market limps toward the final trading months of the year.

Here’s an update on where we are now:

Only 12 of the 30 Dow stocks are positive on the year—and most of these winners have coughed up their gains and are hovering around breakeven. The only names sporting double-digit gains from the group are Home Depot, Nike, UnitedHealth, and Disney. Put all 30 of ‘em together, and the Industrials are down almost 8% year-to-date.

One by one, the outperforming names getting sucked back into the sticky, back-and-forth market chop. In fact, the market is more correlated right now than it’s been in some time…

“Highly correlated markets – that is, markets where most assets are moving together – are a problem because when everything is doing the same thing, there aren’t any alternatives. In other words, there’s only ‘one trade’ out there. And historically speaking, when correlations spike, it’s associated with downside moves in the market,” our own Jonas Elmerraji explains.

“And after starting the year decreasing, market correlations have been spiking ever since the big drop in the S&P that happened last month.”

Just check out Jonas’ chart and see for yourself:

The Correlation Conundrum

“Market risk is still quite high,” Jonas continues. “In fact, it’s probably a lot higher than most investors realize. And with high correlations, we can expect everything to make a big move at the same time and in the same direction.”

With stocks sticking together more by the day, you have to be sure to stay on your toes this week. It’s getting harder and harder to find standouts. So we’ll be biding our time and picking our spots. Never feel that you have to make a trade.

Hang in there. We’ll dig up some new standout trades soon enough. We always do…


Greg Guenthner
for The Daily Reckoning

P.SDon’t get “stuck” in a sticky trade.  If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, right here. Stop missing out. Click here now to sign up for FREE.

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