There are underlying trends that help push the market for a significant period of time.
Identifying these trends is critical to your wealth.
Some years, it’s as easy as following institutional fund flows.
Other years, you just needed to understand that easy money would fuel a stock market rally.
But right now, there’s another major trend that everyone must have on their radar, and that’s the boom in passive investing.
When a fund simply owns broad exchange-traded funds (ETFs) on your behalf, that’s passive investing.
Even if you invest in an actively managed fund, odds are you are still exposed to ETFs because more fund managers are using those as liquid, tradeable assets — just like individual stocks.
This has helped the whole ETF industry balloon to an enormous amount over the past decade.
It’s created extremely profitable opportunities if you understand how these investments work.
There have already been many studies to show that ETF investments have surged. And even more on the takeover of passive investing. So, I won’t bore you with much more on that.
But one thing they lack is taking you to the next step and telling you how to profit.
Today, I’m going to let you in on a little secret — all you have to do is follow the money.
A Force to Be Reckoned With
First, let’s look at a chart to demonstrate the surge in dependence of passive investing through ETFs.
ETFs have steadily gained traction over the years. In the last decade alone, they have seen assets invested climb by more than six times.
They’re now a force to be reckoned with.
Or, as I’ll show you today, a force to profit with.
All you have to do is follow the money. Here’s how it works.
When someone invests in an ETF, the money gets invested throughout each of the ETF’s individual stock holdings.
And an ETF is simply a basket of stocks.
The basket of stocks will be different for every ETF. But each ETF still represents some underlying investment in the market that the money then gets invested into.
In other words, every stock within an ETF will see a boost to its buying when an investment goes into the ETF.
That means an investment into or out of a particular ETF can move a large group of stocks, regardless of the individual stocks’ specific situation.
ETF fund flows are large enough to disrupt the markets now. And that means they’re large enough to profit from as well.
It’s this path of fund flows that led me to develop a completely unique view on seasonality in the stock market. One that has been extremely profitable for me, and my readers.
The Power of Identifying Seasonal Trends
Understanding how dominant ETFs and passive investing are in the market is only the beginning of one of my most profitable investment services I offer — Automatic Profits Alert.
It’s tied to seasonality, and at first sight, may not seem to be based on ETFs or passive investing at all.
But the reality is that those two items play a major part in how I look at seasonality — by ignoring an individual stock’s seasonal trends.
To me, the individual seasonal trends are practically meaningless.
Sometimes they play out as expected, sometimes they don’t.
But it’s the tug-of-war that ETFs bring to large groups of stocks that has helped me generate huge gains by following sector seasonality.
Once I identify the seasonal characteristics of a particular sector, I’m then able to select the ideal stock to experience a significant rally as those funds move in.
Like gains of 35% in a consumer discretionary stock pick, or gains of 37% in a telecommunication play. Even 50% from a play on the materials sector, and 64% from a little-known real estate company.
This is the power of identifying the seasonal trends for sectors of the stock market, or prime seasons as I call them.
Chad Shoop, CMT
Editor, Automatic Profits Alert