Mike’s note: Our special Market Minute: Evening Edition with master hedge fund trader Larry Benedict continues tonight as we approach his exclusive presentation about a volatile market phenomenon that he calls “The 7-Day Blitz.”
His presentation starts tomorrow at 8 p.m. ET, where you can join Larry as he reveals how some of his subscribers have seen gains of 184% and 212% during this unusual week that’s quickly approaching. He’ll also share the one ticker that could help everyday folks achieve the same success he has… So, if you haven’t already, click here to sign up.
As for today’s essay, read on to find out one of Larry’s most profitable “secrets” he’s learned over his career…
By Larry Benedict, editor, The Opportunistic Trader
Today I want to share with you the “secret” to my trading success.
It’s not some mysterious algorithm or a weird chart indicator you’ve never heard of…
No… The thing that made me a successful trader is actually quite simple. And it’s something I have no doubt you’ve heard many times before…
What goes up, must come down…
Reverting To the Mean
In the trading world, we have a more technical term for that phrase: Mean reversion. It’s when an asset gets so overextended, either up or down, that it quickly returns to a more neutral place.
This is a common behavior of investors. When stock prices seem to churn higher every day, the idea that they could ever fall becomes more and more unbelievable. The same thing happens on the way down – when stocks fall every single day, it’s hard to imagine them ever rising again.
There were several times this past year where we can see this dynamic – the most obvious being in February 2020.
Stocks got overextended to the upside all throughout January and February. The S&P 500 index rose from 3235 to 3400 – a 5% gain in just two months. (Historically, the S&P 500 has risen 10% per year since 1926. That means the start of 2020 saw half of that average gain conquered in just two months.)
Meanwhile, the coronavirus pandemic was raging across China. But investors were taking the news in stride. In a way, the performance of the stock market almost seemed to inspire confidence that the pandemic wouldn’t reach U.S. shores. Now, we know how that turned out…
Regardless, investors chased this practically one-way march higher all through January and February. Stocks seemed to be going up with no end in sight, even in the face of such massive risk. How could anyone let that opportunity go?
In conditions like this, people lose their sense. They feel the FOMO (fear of missing out). And they throw all sound investing principles out the window.
You don’t need me to tell you that that’s a huge mistake. But it’s amazing how quickly people forget this when there’s a golden carrot dangling in front of their face.
But they’ll never catch that carrot. Unfortunately, in most cases, it leads them off a cliff.
And that’s just what happened at the end of February. The S&P 500 spent the next month and a half plunging 35%… In one of the harshest stock market crashes since Black Monday. It wiped out all the gains of the previous three years.
And anyone chasing stocks in those early days of the pandemic got crushed…
What You Should Do Differently
I’ve been trading for a long time. So when I see situations like what I just described, I know the exact way to play it.
When stocks get bid up to unreasonable levels – especially if investors are ignoring major market risks – the right thing to do is to take the opposite side of the trade.
Now, taking the other side of a popular trade isn’t easy. And you might go through a few painful days, or weeks, before you start to see any positive results.
But once you do, it can be well worth the time it takes for your trade to play out.
Lets look at an example…
One of the winning trades I recommended last February was on the iShares 20+ Year Treasury Bond ETF (TLT).
TLT is a proxy for the Treasury bond market. And Treasury bonds tend to move the opposite direction of stock prices.
Hearing that, you might think I decided to bet on a Treasury bond rally – to benefit from the market falling.
But at the time I recommended that trade, when the market started to fall apart on February 28, I was actually looking for a short-term bounce in the stock market from oversold levels. That would’ve sent T-bonds lower.
And aside from moving inversely to stock price moves, Treasury bonds also tend to react to big macro events. Think of T-bonds as a bet on the future success of America. When the pandemic hit U.S. shores, that confidence in America diminished… At least for the short term.
So, I recommended my readers buy put options on TLT. And just a couple weeks later, we closed the position for a 62% gain. We also made 40%, 15%, and 34% on trades we made that same day.
Here’s my point…
The most dangerous thing a trader can do is simply follow the herd. When everyone was buying into stocks in January and February 2020, while ignoring the massive risk the pandemic presented, I knew it was time to look for mean-reversion opportunities.
You should always look to take the other side of an overly popular trade. Look for bets on an overextended condition reverting to its mean, and get ready to profit while everyone else panics.
Right now, there’s a lot of interest in “risk-on” assets like speculative tech stocks and cryptocurrencies like bitcoin. In my view, it may soon be time to take the other side of that bet.
Editor, The Opportunistic Trader
P.S. When I trade, my #1 concern is to avoid unnecessary risk. After all, trading is just as much about making money as it is about not losing money.
In fact, during a few specific periods each year, I recommend my subscribers trade just one ticker. And often, we’re able to trade that one ticker for substantial gains.
It’s all thanks to a strange event I’ve come to call “The 7-Day Blitz”, for how fast and furious the trading gains can come – if you know where to look.
Tomorrow night at 8 p.m. ET, I’m putting on a special presentation with all the details behind this rare trading window, and how you could use it to potentially make more money in one week than most people make all year. Just click here to register, and learn all about this strategy…