Why Low-Volatility, High-Income Trades Make Sense In This Market…
For the past couple of days, I’ve highlighted various indicators that point in different directions. But what they do agree on is that a big more is coming.
This is one thing we can feel a degree of certainty about with regard to the stock market. And it can be seen clearly in the chart below.
The SPDR S&P 500 ETF (NYSE: SPY) — and the index it tracks, the S&P 500 — have been in a trading range since April 5. That was a Monday. The market gapped higher at the open. That was a delayed reaction to better-than-expected employment numbers the government released the previous Friday. Exchanges were closed that day for the Easter holiday.
Over that long weekend, traders saw good news about the accelerating pace of coronavirus vaccinations, and several states began easing pandemic-related restrictions on businesses. Later in the day, Sen. Joe Manchin, the moderate West Virginia Democrat who is the swing vote in an evenly divided Senate, announced his opposition to a corporate tax increase President Biden proposed.
Biden called for raising the corporate tax rate to 28% from 21%, sparking a short selloff in late March. Manchin told reporters he believed the rate should have “never been below 25%.” Traders interpreted that to mean he would be okay with a maximum rate of 25%, which is more bullish for stocks than a 28% rate.
Since then, stocks have continued higher and formed a trading range. Declines last month stopped near the level of the April 5 open. This is an area of strong support on the chart, and a move below that level should lead to a strong wave of selling that pushes prices down sharply.
Rallies have run into resistance noted by the upper line in the chart. We are once again challenging that line. A break above $420 should lead to a quick move higher.
How I’m Trading Right Now
For now, we remain in the range, and conservative traders should wait for a breakout. That doesn’t mean we shouldn’t trade — but it does mean we should consider risks.
That’s why I recently recommended a trade on a stock in a low-volatility sector: real estate.
Innovative Industrial Properties, Inc. (NYSE: IIPR) is a real estate investment trust, or REIT.
REITs have special tax advantages and that makes them attractive income investments. Like other income investments, they generally have low volatility. In the past year, REITs experienced greater-than-average volatility as traders worried about the economic shutdown. Volatility continued as traders worried about how many businesses would fail as the economy tried to recover.
Recent economic data shows the economy is nearly back to normal and the number of failures seems to be lower than originally feared. Volatility is decreasing in REITs as these trends continue.
IIPR will generally be a little more volatile than average REITs because the company is focused on owning and managing specialized properties leased to experienced, state-licensed operators for their regulated medical-use cannabis businesses.
However, the marijuana sector is also decreasing in volatility as states continue to legalize its sale. Advocates are hopeful the Democratic-controlled government will legalize marijuana at the Federal level.
This decreases the risk in the sector. However, I still prefer short-term trades in marijuana stocks, and this is a short-term income trade. I also reduce risk by trading when my Income Trader Volatility (ITV) indicator is bullish — as it is in IIPR.
The trade we made in IIPR is interesting for a lot of reasons. Consider the stock itself… Feel nervous about investing in the volatile marijuana sector? An income-focused real estate play like IIPR may be a better alternative to simply avoiding the business altogether.
It’s a good example of finding a middle ground between not taking on too much risk — while also giving ourselves the chance to enjoy some upside.
That’s exactly what we’re doing right now with the overall strategy we use over at Maximum Income. While risks are high in the market right now, there’s no reason to sit on the sidelines. Instead, we use a time-tested strategy to generate immediate income from stocks we own — while still giving ourselves the chance to enjoy some upside.