Friday, November 24, 2017

3 Ways To Trade A Mature Bull Market

It amazes me to this very day that so many people in the financial media are still looking for 30 percent gains this year. Does anyone realize, this bull market which began in March 2009 is over five years old now? Most bull markets will last between three and four years in length, but this current bull market has lasted much longer, on the back of the easy money by the central banks around the world. In fact, the S&P 500 Index has not even had a 10.0% correction in over a year on the back of the current easy money stimulus. So while this bull market is very long in the tooth, it becomes tougher and tougher to make money for the average investor who is not aware of how to trade it. Just look at the S&P 500 Index in 2014, it has traded in a choppy sideways range since January.


Here is three ways to trade a mature bull market for profit:

1. Traders and investors need to use the technicals (reading charts) now more than ever. In a bull market everything rises, but in a late stage bull market, leaders will fall and fall fast. Just look at the leading biotech stocks such as Celgene Corporation (CELG), and Gilead Sciences Inc. (GILD) recently; these stocks have fallen off of a cliff. Traders and investors that understand the technicals (charts) would have recognized the topping signals that these stocks gave traders at the start of 2014. Technical traders also benefited from the important support levels when these fallen equities staged sharp upside bounces. The bottom line, your first step should be learning how to read charts, especially in a mature bull market.

2. It is critical to track the industry groups and sectors that are showing weakness and strength. As I have mentioned earlier, the biotech stocks were one industry group to fall sharply lower from their 2014 highs. Now, the leading retail stocks are starting to tumble; this is a sector that traders may want to avoid in the near term. The home-builder stocks are also coming under selling pressure, this tells us that this sector should have further downside to go. Recently, the social networking stocks have faced heavy distribution. Social networking stocks such as Facebook (FB), Twitter (TWTR), and LinkedIn Corporation (LNKD) are just a few more stocks that have been punished this year. So where is the strength in the market? Integrated oil stocks such as Exxon Mobil Corporation (XOM), ConocoPhillips (COP), and Chevron Corporation (CVX) have all been very strong, trading at or near new 52-week highs. During late stage bull markets there will be less and less strong sectors to trade. It will be critical to recognize this so you can stay out of trouble.

3. You must know which of the leading stock indexes you should follow, and which you should not. Most people in the general public will follow the Dow Jones Industrial Average. This is the wrong major stock index to follow, and you will see that the public and the media track this index the most. As a trader or investor you must follow the NASDAQ Composite, and the Russell 2000 Index. You see, when people invest in the NASDAQ Composite, and the Russell 2000 Index they are investing in growth assets. Most of the stocks in these indexes do not pay dividends because they are not mature blue chip companies, they are still trying to grow. So when you invest in the NASDAQ Composite, and the Russell 2000 Index, you are taking on real risk. Unlike investing in the Dow Jones Industrial Average, where you are investing for dividend income and mild growth at best. Basically, when the NASDAQ Composite, and the Russell 2000 Index are not leading the markets higher, it is a real warning sign that economic growth is stalling and the stock market is very vulnerable to declines. Since the start of 2014, the NASDAQ Composite, and the Russell 2000 Index have lagged the Dow Jones Industrial Average and S&P 500 Index, telling us that this bull market is very mature and getting tired.


Take heed of these principles for trading a mature bull market and not only will you save yourself from losing, you will enable yourself to win far more than you lose. As a smart trader and investor, the one thing we can be certain of is that there is always a trade – unlike the investor who follows the media hype and holds the bag on a bad trade. If you are prepared and aware of the best ways to follow the markets and position yourself for the moves, you will leaps ahead of the general public.


Nicholas Santiago


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