Why I’m Not Concerned About A Few Bad Days In The Market Right Now…
On Tuesday, we saw a 1.4% decline in the Dow Jones Industrial Average. After the close, The Wall Street Journal posted this headline on its website: “Stocks Fall as Dow Posts Worst Day Since February”.
While that was a significant decline worthy of a story on the site, I’m concerned about the focus on how it was the “worst day since February.” The last time the Dow fell this much was not even three months ago. Sure, this was a big day, but not a historic market move.
All of this confirmed for me that there is a strong focus on the short term in the market. And as I’ve been saying for the past few weeks, this impacts the trading approach we should take.
Based on what I’m seeing and reading, there seems to be an expectation that there will not be short-term selloffs or declines. But the problem with that expectation is that these drops are a natural part of the market. Prices do fall sometimes, and I’m worried that traders will react violently when the next (completely normal) short-term decline develops.
The headline blames inflation for the decline, but there wasn’t any news about inflation. Yes, government data on inflation will come out this week, but traders weren’t reacting to news. In my opinion, they were just nervously selling.
How I’m Trading Right Now
Some of my concerns about the current market are starting to show up in the weekly chart of Invesco QQQ Trust (NASDAQ: QQQ), an ETF that tracks the tech-heavy Nasdaq index. QQQ has been the market leader in the bull market that started in March 2020. At the bottom of the chart, my Income Trader Volatility (ITV) indicator shows a bearish crossover. As you know, crossovers often precede declines.
The ITV signal is worrisome. So is the break of support (blue dashed line) in the chart’s top right corner. Most concerning is the steep rise that occurred since last March. This tells me that there are likely a number of traders with gains from that climb. If the market shows any sign of weakness, those traders may sell quickly to protect their profits, and that much selling could lead a natural decline into a bear market.
Of course, I’ll be watching the broad market closely for signs of what could come next.
The good news is that I am still seeing opportunities in individual stocks. For example, I recently recommended a trade in United Parcel Service, Inc. (NYSE: UPS).
The stock is up on a strong earnings report and positive outlook. And while we could simply buy the stocks and hold it, we can use my “P.I.N.” code strategy to get paid immediately.
Now some of you may know that this strategy has to do with options. Well, that gain increased volatility and raised options premiums, providing an opportunity for a short-term trade. To minimize the risks on the trade, I am recommending a trade that will be open only a little more than a month.
There is little risk of adverse news in that time even if inflation does increase, UPS can rapidly adjust its pricing with fuel surcharges as it has in the past. The company is not immune to inflation, but it is among the lowest-risk trades in this environment.
If all goes according to plan, we can earn roughly the same amount of income in a few weeks as regular shareholders would in a year. Even better, we can repeat a similar trade in UPS again and again…
As I’ve said before, I firmly believe this strategy is better than simply buying and holding a stock. It focuses on the short-term and allows us to generate income right away — which reduces our risk. This means we can easily move on to another promising trade — or repeat a similar trade in the stock if we want.
Want to learn more about my “P.I.N.” code strategy? Go here now…