Trader’s Paradise: Here’s How You Rake in the Gains…

Investors have devoured every stock market dip.

Third-quarter trading ends today at 4 p.m. Barring some unforeseen disaster, the major averages will easily finish the month with year-to-date gains intact. The S&P 500 is up more than 12% year-to-date and sitting at all-time highs. The Nasdaq is up almost 20%. All is well in brokerage accounts across the nation.

Investors aren’t feeling a lick of discomfort this year. Volatility is dead and buried. Manic market swings are no more. In fact, the craziest thing about this year’s market is that it’s one of the sanest investing environments of all time.

The S&P 500 has not rattled investors with a 2% move — up or down — at all this year. The last time that happened was 2005, according to the WSJ’s Daily Shot.

It’s no secret that markets have enjoyed smooth sailing in 2017. A quick look under the hood shows why. When one group of stocks takes a hit, investors flip the script and shift their money to different sectors.

Bull markets spin from one hot group of stocks to the next. Any weakness in one area is concealed by the next group of winners. That’s market rotation in action.

The result is a trader’s paradise. When one trend begins to stall out, there’s always another hot trade waiting in the wings. That’s why market rotation has been one of our big themes over the past few months. As I’ve noted since we saw the first signs of tech stock rotation back in the summer, we need to constantly reevaluate our positions and jump on the most lucrative trends for the third and fourth quarters.

To be clear, I’m not predicting that the FAANGs and other year-to-date winners will flame out during the fourth quarter. Ideally, the tech leaders from the first half of the year will simply trade in a sideways range to digest their gains. That’s healthy market action. Remember, no stock can climb higher in perfectly straight line. Even the strongest trends need a break every once and a while.

Luckily, the market continues to offer clues as to what stocks and sectors will shine during the final trading months of 2017.

While the big tech stocks took a break in September, some of the market’s forgotten sectors took the lead. The energy sector has rocketed more than 10% in September. Retail stocks soared 7% this month. Bank stocks jumped 8%. Small-caps ripped off their lows and posted gains of 6%. These are just a few spots where the hot money is flowing right now…

You should be more than ready for this market shift. After all, we’ve spent a good part of the month building new trades taking advantage of these rejuvenated sectors.

As far back as July, we were reducing our exposure to the FAANGs and other big tech names that were so generous to us during the first and second quarters. We also added to some of our unloved positions that were showing new signs of life.

The iShares Russell 2000 ETF (NYSE:IWM) is the perfect example. Small stocks have gone from the brink of a breakdown to market leaders this month. Yesterday, the Russell 2000 built on its incredible winning streak and posted new all-time highs.

The market’s changing before our eyes. Most investors will be caught off-guard. Don’t be one of them. Pay attention to the signs of market rotation and you’ll continue to rake in consistent gains as the market preps for a potential fourth-quarter melt up.

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning