The Tycoon Report

Profitably 'Buck' the Broader Market Trend

We are still seeing a lot of strength in the overall marketplace. Bullish sentiment is riding high, and it seems that bad news has little to no negative effect on stock prices.

That is the very definition of a bull market. Of course, we have no idea how long this happy state of affairs will last. This is why it doesn’t make sense to be a rampant contrarian bear at this point.

We are seeing some pockets of sector weakness, though, and last week I highlighted eight such sectors to add to your "short" list. In a market like this, if you really have an itch to buck the trend, you want to make sure that you are doing it on a sector basis -- not a market basis.

What do I mean by that?

Augment Your Portfolio With Smart Sector-Based Trades

Now is probably not the time to start wholesale shorting across all industry sectors. In our automated trading service, Sector Hunter, we are still seeing the majority of individual sectors strengthen each week.

This tells us that it’s too early to become super-bearish. The bulls are still very much in control of this market.

However, the air is getting thinner and thinner, the higher the market goes. We’re starting to see many sectors trade up to levels that have signaled secular high points in the past. One of the sectors we track over at Sector Hunter just put in a sell signal, and we could be just a few days away from seeing several more come across the tape.

So, what should you do to position yourself for trading profits, no matter which market direction prevails? The best strategy right now is to ride what winners you have but not to be a big buyer of new positions right now.

Chris Rowe, who manages the options-trading service The Trend Rider, wrote an excellent article yesterday on how to buy stocks in a market such as this. I highly recommend that you read it.

If you are looking to add to an existing position, Chris’ article will show you one of the best ways to do that. Just remember that, if you are initiating a new position or adding to an existing one, you should add a tight stop-loss to limit your losses.

In Chris’ article, he explained how to buy on a retracement of either 50% or 66%. (That is, buying on a pullback before a stock resumes its uptrend, or establishing a short position during a temporary surge.) Depending upon which method you use to get long, you may want to set your stop-loss marginally below the normal retracement level of the stock in question.

You Won't Miss the Next Big Move if You're Prepared for it

Much of the big money on the long side has already been made. These days, you could find yourself trying to pick up pennies in front of a steamroller.

That's not to say that there still isn’t any upside left in many sectors. Clearly, there could be, but the balance of risk is shifting and you need to have your eyes wide open about it. Don’t allow yourself to get lulled into a false sense of security.

What will separate you from other traders and investors is taking the time to let the market develop in front of you. Never rush or hurry yourself; remember, the time to be a raging bull was in February and March -- not April.

If a new bull market phase is ahead of us, then that’s great. You won’t miss it because all bull markets take breaks and, in these breaks, you’ll be able to get long at sensible prices.

If a new bear market leg is in the offing, you don’t want to try and preempt it. You’ll get plenty of warning, and the market will plainly telegraph such a change in trend. I think many traders get over-committed one way in the market on a hunch or even a strong belief before waiting for the market to confirm their opinion.

The root of this trader misstep is a fear of missing out on the next big move. But what we’ve seen is that the market gives us plenty of opportunities to get short during the down legs and lots of opportunities to get long during the up legs. The difficult part is waiting for the confirmation and then trusting the confirmation when it’s observed.

Time to Take a Walk on the Short Side?

On the index front, I’m looking for a break below 830 on the S&P 500 (SPX) with a failed attempt to rally back above 870. Should the S&P fail to rally back and make a lower high after selling off, that will serve as my confirmation to get much more aggressive on the short side (i.e., by shorting stocks or buying put options to take advantage of an expected downward move in a stock, index or Exchange-Traded Fund that represents an overall sector).

The logic here is that if the market is going to break down again, it isn’t going to do so without a fight. So, if we see the failure to claw back and make new highs, it could be a very good sign that the bears are back in control.

Although this happens to be the confirmation signal that I’m looking for, it doesn’t necessarily mean that it will happen or that it’s even accurate. Only time will tell. The point is that you need to have some way to gauge when the trend is turning in a meaningful way.

I also rely heavily on the data we get from Sector Hunter. If I see a large number of sectors posting sell signals along with a general breakdown in the major indexes, I treat it like a megaphone warning to get short, and quickly!

But we are not there yet, and we may not get there for a long while. Who knows how long we will stay up here -- I certainly don’t, and thank goodness I don’t have to figure that out. All I have to do is listen to my indicators, trust them, follow them and let them do the heavy lifting.

5 Questions to Ask Yourself Before You Make the Trade

Whatever system you end up choosing to guide your investment decisions, make sure that you stick to it and trust it. You must develop a systematic approach for how to invest. You’ve got to have investment rules that govern:

1. What to buy/short.

2. When to buy/short.

3. How much to invest.

4. When to take losses

5. When to take profits.

If you're struggling with the answers to these questions, my ETF Master Trader training course outlines everything you need to know to trade Exchange-Traded Funds to take advantage of sector moves.

Remember, in a bull market, there's always a bear market taking place somewhere. And conversely, in a bear market, individual sectors are experiencing their own bull runs. You can and should be taking advantage of these opportunities so that you can be turning one profit after the next, while other investors are too scared to make a move that could possibly enhance their financial future.

As I said earlier, if you want to buck the trend with your trading, the broader market is tough to trade. But if you make smart sector bets, you can profit in any type of market conditions.