Last week I asked the question “What Would You Do?” If you were an institutional trader or professional advisor, would you take the risk to make any further gains this year? Earlier this month the Dow Jones Industrial Average, the S&P 500, the Russell 2000, and the NASDAQ Composite set lower highs after failing to break above resistance.
But what if you answered “Yes”? You believe a rally through the end of the year is possible, and as soon as a rebound starts, you want to go for additional gains. How would you do it?
You could consider individual stocks, but you would have to be very selective right now. Many big-name stocks are down significantly and still showing signs of distribution. You would really have to do your homework to find the right trade candidates.
But what if you just wanted to trade an index ETF? The gains, if you were right, would probably be lower, but the odds of success would probably be higher, as you wouldn't have the risk of one or two bad stock picks significantly affecting your returns. What major index ETF would be the best one to take a chance on?
Here we with about 7 weeks left in the year. Would we consider taking a chance on the small caps?
IWM, the ETF based on the Russell 2000, has had only one losing year (15 years ago) over the next 6 to 7 weeks, and has averaged a 4.0% gain:
So maybe technology leads year-end rallies. But the QQQ, the ETF based on the NASDAQ Composite, has averaged only a 3.6% gain over the next 7 weeks, with gains in just 64% of the years:
Well maybe it is the overall market that will provide the safest bet, so let's look at SPY, the ETF based on the S&P 500. But SPY has averaged only a 2.6% gain through the end of the year, with gains in only 4 out of 5 years:
Alas, it is the unexpected Dow Jones Industrial Average that provides the best bet. Over the next 6 weeks, DIA, the ETF based on the DJIA, has gains an average 2.7%, but it has a 100% track record:
If you are curious about the 7 week return, to compare apples-to-apples, DIA has averaged a 2.7% gain, but 2002 produced a -2.6% return instead of a 0.2% gain over the 6-week period, so it has an 88% track record.
As I write this at 5 hours before Monday's start of trading in the U.S. markets, Asian and European stocks are down. DIA is currently down almost 1% in premarket trading. The U.S. may be due for another down day. But if we get a good reversal day this week in the markets, and you feel an urge to take a chance on a major index ETF, DIA, a bet on the basic Dow Industrials, would be your best bet based on history.
And any rebound in DIA would likely cause Implied Volatilites to drop. Options on DIA may be relatively cheap as DIA's IV would be close to 12-month lows:
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
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