Investor Insights:

  • The Dow Jones Industrial Average is less volatile and more conservative than other indexes.
  • In 17 of the past 21 years, the Dow ETF delivered a gain with my simple strategy.
  • That’s a win rate of 81%!

Many hedge fund managers are cautious near the end of the year.

If they have large gains, they want to be sure they keep them. That’s because their bonuses are based on performance.

When a manager sees a big gain at this time of year, they focus on avoiding losses. Losing trades could cost them thousands of dollars of their bonus.

But their bosses and investors won’t let them sit in cash for a few months just to lock in a bonus. So, managers tend to move to safer stocks, like the ones in the Dow Jones Industrial Average.

Now, some readers may be thinking I just made up that story. I didn’t. Data supports this idea.

The Dow includes 30 of the largest stocks in the market. That makes it less volatile and more conservative than other indexes.

More aggressive tech stocks deliver gains 78.6% of the time. At first glance, their average gains are better than the Dow’s. But remove the 50% gain that sector delivered in 1999, and the Dow beats tech.

For small-cap stocks, the win rate is 73.7%. Their average gain is smaller than the Dow’s. The same is true for the popular S&P 500 Index.

The Dow is consistently the best performer in the last three months of the year. And I have a simple strategy for you today that lets you take advantage of the Dow’s reliable gains.

A Winning Strategy

The SPDR Dow Jones Industrial Average ETF (NYSE: DIA) began trading in 1998. In 17 of the 21 years since then, DIA delivered a gain with this simple strategy.

That’s a win rate of 81%.

This trade requires buying and selling once a year. The holding period is just three months.

To trade this strategy, you buy DIA when the market opens on October 1. You sell at the close on December 31. That’s it.

The chart below shows all trades over the past 21 years.

chart shows all trades over the past 21 years.

Despite occasional losses, the strategy is a winner over time. The average gain was 6.1% in three months.

In comparison, if you randomly buy on any day of the year and sell three months later, your average gain is only 2.2%.

Compared to a random entry, the average win for holding in the fourth quarter is almost three times larger.

Trading Options for the Fourth Quarter

Instead of buying DIA shares, you could buy a call option.

Call options give buyers the right, but not the obligation, to buy 100 shares of a stock or an ETF at a predetermined price for a limited amount of time. Since there’s no obligation to buy shares, buyers of calls can never lose more than they pay to enter the trade.

You can buy a call on DIA that expires on December 31. There are several to consider:

  • Conservative investors can buy the December 31 $260 call option. This option costs about $1,450. If DIA delivers an average gain, the option would be worth at least $2,500 at the end of the year. That’s a potential gain of about 72%. The symbol for this option is DIA191231C00260000.
  • Average investors could buy the December 31 $270 call for about $800. An average gain would result in a gain of about 88% for this trade. The symbol for this option is DIA191231C00270000.
  • Aggressive investors could consider the $280 call for about $300. This trade would gain about 67% if DIA delivers an average gain. The symbol for this option is DIA191231C00280000.

Now, options expire. If DIA is below the exercise price of the call on December 31, there’s a 100% loss.

Despite possible disadvantages, many traders will find at least one of these options is a great way to trade the next three months.


Michael Carr, CMT, CFTe

Editor, Peak Velocity Trader