The Fed is sticking it to investors…
After 11 interest rate rises since last March… and inflation down to 3.7%… investors have been hoping America’s central bank would soon start lowering rates.
But last Wednesday, Fed boss Jay Powell warned this was a pipedream.
He said he would be keeping rates “higher for longer” to knock down inflation even further.
Higher rates slow growth. So, this sent stocks tumbling.
The blue-chip S&P 500 and the tech-heavy Nasdaq had their worst weekly losses since March. The Dow also ended the week in the red.
And this week, the carnage continued. Stocks went deep in the red during Tuesday’s session.
The three major indexes, as well as every individual sector within the S&P 500, saw declines throughout the day.
And the CBOE Volatility Index (VIX) – also known as the “Wall Street’s fear gauge,” shot 9% higher.
The VIX goes up as investors start to see more volatility ahead for stocks.
Larry Benedict saw it coming and profited from the turmoil…
If you don’t already know Larry, he rose to fame in 2012 as one of the world’s most successful fund managers featured in the book Hedge Fund Market Wizards.
From 1990 to 2010, he didn’t have a single losing year as a trader. And in 2008, as the stock market and the economy were falling apart, Larry made $95 million at his hedge fund, Banyan Capital.
This caught the attention of the book’s author, Jack Schwager. And he set aside a chapter for Larry. (It came after his chapter on Ray Dalio, the manager of the world’s largest hedge fund.)
I’ve been having weekly chats with Larry about his “macro” – or big-picture – market outlook.
And in my conversation with him on August 29 (Larry subscribers can watch here), he flagged September’s bout of volatility.
As he told me…
If I were long stocks, I would probably be looking to sell some. I think we’re going to come into a little “seasonality” in September and get a real down move.
September and October have historically been weak months for stocks…
It’s part of what folks on Wall Street call seasonality – the tendency of markets to perform better or worse during certain times of the year.
You may have heard of the “Santa Claus Effect.” It describes the tendency for stocks to rally in the last week of December and the first week of January.
The “September Effect” and “October Effect” are the flip side of these.
Although stocks can rally through these months, they’re also famous for crashes and market panics.
The most famous of these happened on Tuesday, October 29, 1929.
Known as Black Tuesday, it was the worst stock market crash in U.S. history and led to the Great Depression.
Another day that will live in infamy is October 19, 1987 – aka Black Monday. It saw the largest single-day percentage decline in the history for the Dow.
And as Larry was alluding to, September is also a time when volatility famously kicks up.
The Panic of 1907 happened on September 17, 1907.
Most folks have forgotten about it. But it was a financial crisis that began in New York City and spread to other financial centers around the world.
And more recently, the stock market crashed in September 2008, as the global financial crisis reached its peak. The Dow plunged about 20% during the month. And the S&P 500 plummeted more than 17%.
But for traders like Larry, that extra volatility is actually a good thing…
When stocks go on a roller coaster like this, it’s no fun for long-term investors.
But as I’ve been showing you in these pages, it’s “harvest time” for traders.
Back to Larry…
It’s tempting to stay on the sidelines in cash when the stock market is chopping back and forth. And if you’re okay with inflation eating into your savings at a rate of nearly 4% a year, that’s fine.
But I’d rather trade stock market volatility for profits.
I can’t tell you if the stock market will be higher or lower a year from now. All I know is that it does a whole lot of moving around. And as a trader, that’s the kind of market I crave.
I can profit in both directions – up and down. And I can be in and out of trades in as little as a day. When stocks are as choppy as they are now, this vastly increases my chances of making money. I have more opportunities to trade. I can also capture bigger moves.
Larry profited this time by “going short” the Nasdaq…
Tech stocks tend to rise more than the overall market during a rally.
The flip side of that is that they tend to drop harder during a selloff.
And on September 14, Larry latched onto one of those plunges. Over at this One Ticker Trader advisory, he recommended his readers to go short – or bet against – the Invesco QQQ ETF (QQQ).
It tracks a basket of the biggest tech stocks listed on the Nasdaq.
Here’s a chart of that trade that Larry shared with his readers…
Invesco QQQ Trust Series 1 (QQQ)
Source: e-Signal
As you can see, he exited this trade in two tranches.
First, he booked a 41.9% gain on half the position following a big down day for the markets (Exit 1 on the chart)
Then, when the Nasdaq continued falling the next day, Larry closed the second half of the trade (Exit 2) for a 106% gain.
The gave subscribers who followed his trade the chance to make a blended gain of 74%.
That was just one of the 10 winning trades Larry has notched in the model portfolio at One Ticker Trader this year.
It’s why I hope you check out Larry’s advisories…
His big win on shorting the Nasdaq is more proof of something I hammer home in these pages to readers all the time.
Even during a bear market, you can make money… if you use the right strategy.
And although this may sound strange to buy-and-hold investors, traders like Larry love it when stock prices bounce around a lot.
It gives them more opportunities to trade. It increases profit potential on winning trades.
So if you haven’t already, take some time to do some research into Larry’s strategy. Adding the tools Larry uses to your portfolio could turn events like the recent market selloff into one of your most profitable weeks of the year.
You can start following Larry over at his free e-letter, Trading With Larry Benedict. Just go here to subscribe.
Regards,
Chris Lowe
Editor, The Daily Cut