Investor Insights:
- This past Friday, stocks closed 335 points above the 200-day moving average.
- The last time that happened, stocks fell 10.2% over the next two weeks.
- I have a short-term idea you can use to quickly make a 181% gain.
Do you remember the last downturn in stocks?
On December 24, 2018, the S&P 500 Index closed more than 400 points below its 200-day moving average (MA).
An MA is an indicator technicians use to assess the strength of the market.
On that day, the MA was further from the index than it had been in more than a decade.
Since then, stocks haven’t stopped rising. They’re up more than 40% in 13 months.
Today, I want to tell you about a similar level the market just reached last Friday.
However, unlike the one highlighted above, this one is bearish.
The Stock Market Is Overheating
This past Friday, stocks closed 335 points above the 200-day MA.
The S&P 500 Climbs 335 Points Above Its Moving Average
This is the opposite of what happened on December 24, 2018. (That day is at the bottom of the V shape on the above chart.)
As you can see, this isn’t common. And we may be in for a brief pullback.
Prior to last Friday, the only time stocks had ever closed at least 335 points above the 200-day MA was on January 26, 2018.
When that happened, stocks fell 10.2% over the next two weeks.
We’re Overdue for a Little Volatility
If you’re like me and think the market could fall a bit in the near term, you should consider hedging your portfolio.
One way to do that is to buy a little of what worked the last time the market was at this level.
From January 26, 2018, to the temporary bottom two weeks later, four exchange-traded funds (ETFs) jumped more than 50%.
Three were volatility-based ETFs … and the fourth was a bearish China ETF:
| Exchange-Traded Product | Ticker | Return, 1/26/18 – 2/8/18 |
| ProShares Ultra VIX Short-Term Futures ETF | UVXY | 181.4% |
| ProShares VIX Short-Term Futures ETF | VIXY | 99.6% |
| iPath Series B S&P 500 VIX Short-Term Futures ETN | VXX | 99.5% |
| Direxion Daily China Bear 3x Shares ETF | YANG | 54.8% |
(Source: Bloomberg)
The three volatility-focused names will help protect your portfolio if there’s a temporary drop in stocks.
The China-focused ETF is already up quite a bit this week because of worries about the coronavirus in Asia. So it may not have as much upside as the other three.
All you need to do is buy shares as soon as possible, and then make an alert to reassess the position two weeks later. So if you invest on Friday, January 24, you’d revisit it on Friday, February 7.
If the trade is moving in the right direction, continue to hold. Sell the day it closes lower.
Please note, however, that if the market stays flat or rises, you’ll lose money on these positions.
This is just a short-term idea you can use if, like me, you think stocks have gone up too high, too fast in the past few months.
Once the volatility settles down, it’ll be a great buying opportunity for the stocks on your shopping list.
Good investing,
Editor, Profit Line
P.S. My colleague Jeff Yastine has uncovered a new class of investments that you need to learn about. It’s likely you won’t hear about them elsewhere … yet they can generate life-changing gains. In a couple of weeks from now, Jeff will reveal his findings in a special presentation. We’ll have more details soon, so check back later to find out more.