The Market's Most Explosive Trades in 3 Can't-Miss Charts
We’re going to hear a lot of whining when the clock strikes midnight on Dec. 31st.
“It’s been another terrible year for anyone looking to beat the stock market,” Bloomberg declared this week.
Terrible, you say? Surely it can’t be that bad…
The difference between various asset classes’ returns are now at levels not seen in almost 20 years, according to Bloomberg. Correlations are up—while volatility is down.
That doesn’t create a particularly good environment for fund managers who are expected to beat the performance of the major averages. We haven’t even entered the fourth quarter yet and they’re already getting their list of excuses ready for angry clients.
It must be time to give up on stocks. With volatility so low and the smart money taking another beating, we should probably just pack it in for the year, right?
Despite what the fund managers and financial media are telling you, this market is offering plenty of chances to book double-digit gains. You just have to hitch your wagon to the breakout stocks that are bubbling up under the surface of the major averages.
Tune out the moans from Wall Street’s underperformers. Try these three correlation-shattering trends instead:
1. Biotechs Blast Off
When stocks first started acting wobbly last summer, the most speculative names were hit the hardest.
Ground zero for the speculative stock purge was the biotech sector. These higher-risk investments took some serious punishment for the better part of the past year. When the going got tough for biotech, investors dropped them like hot potatoes and fled to safety by scooping up utility stocks and consumer staples plays.
From peak to trough, the iShares Nasdaq Biotechnology Index dropped 40%. That’s 12 months of terrifying downside action for any investor who decided to try and ride out the move.
But the iShares Nasdaq Biotech ETF (NASDAQ:IBB) is springing back to life. Biotechs have been working on a new base for most of 2016. Now, they’re shaping up for a big end-of-year rally.
After consolidating August’s breakout move, IBB is now bouncing off its 50-day moving average. Get ready to watch these speculative stocks trounce the major averages over the next several months…
2. Small = Strong
As the market launched off its lows earlier this year, small-caps began to quietly lead the major averages. Now that the Dow and S&P 500 are resting near their highs, we should see these stocks spring back to the front of the pack.
Speculative trading dollars are starting to flow back into small-cap and microcap stocks. The Russell 2000 small-cap index is up more than 9% since July 1st. The S&P 500 is up less than 4% over this same timeframe…
Small stocks are a great measure of risk appetite. If investors are willing to jump back into the smallest names on the market, we can anticipate healthier market conditions in the near future.
3. Financials Fight Back
Financial stocks haven’t been the best investments in this ultra-low rate environment. But some rumblings in the market suggest that could all change before the end of the year.
“The [financials vs. S&P 500 ratio] has been rising since the start of the July making financials one of the third quarter’s strongest sectors,” master technician John Murphy explains on his Stockcharts.com blog. “I take that as a sign that investors are beginning to anticipate higher bond yields. And as is usually the case when bond yields are rising, the financial leaders are banks, brokers, and life insurers.”
Banks are starting to fight back toward their 2016 highs. After tracking closely tracking the S&P for most of the year, these stocks are finally beginning to outperform…
Remember, many groups of stocks endured brutal bear markets over the past year—even as the major averages treaded water. These are the corners of the market that will provide some of the best opportunities to book gains heading into the end of the year.