Rotate Your Money, Pal! (IDU,FAS,HD)

Rotate Your Money, Pal! (IDU,FAS,HD)

Most people who drive automatic cars are unaware what would happen if, while cruising at highway speed, they threw the transmission into reverse.


Now, we’re not suggesting anyone try this on the way home from work, or even down at the local speedway, but having made the blunder ourselves on one occasion, we can assure you that the resulting action is not what you’d think.


There’s no riotous gear grinding, no thousands of itsy bitsy metal pieces shooting out like bullets onto the road, no screeching/wailing/careening this way and that, a la some late 70’s Burt Reynolds movie.


None of it.


The car turns off.


It what?


You heard me.


The car turns off. It goes into some kind of sleep mode.


And here every make and model may be different, but the essence of the matter is that when the car moves from drive to reverse, some sort of ‘save’ button is levered, and the car simply rolls neutral-like toward a stop.


Rev her up and go again!


Our own experience was that a simple turn of the ignition fired up the old Nissan, and we were right back into traffic, honking and gesticulating like the kamikaze kings of the road we are.


Life is a great teacher if we’re open to instruction. And here the lesson was not lost on us.


The matter is straightforward for all market participants.


And it goes like this –


The change from bull to bear market (and bear to bull) happens in an instant. A point is reached at which the trend reverses, and in most cases a sharp, powerful move ensues that overwhelms all but the coldest, most self-controlled among us.


For the rest, just like the old Nissan, it’s too much to bear. The switch from drive to reverse knocks us out completely, and we’re left drifting, staring, wondering what will be as the buggy veers to the shoulder, slows, and the rest of the world whizzes by, leaving us dusty and disappointed, our opportunity for profit, lost.


Don’t let it happen!


The current market turnaround is an event that can’t be ignored. This is the time to climb aboard, to be long-gone equities as the indexes lurch back toward their former highs and beyond.


And know it well – the lurch and surge higher will be accomplished faster than anyone can imagine. All the forces of market bullishness are now arrayed as a single vector. The outcome is inevitable. The only question is will you be on board the last great investment opportunity of the generation picks up speed and starts revvin’ in all four gears.


Before we turn to a trade for the week, let’s take a gander at one that requires your attention.


It’s from just two weeks ago, in a letter called The Builders: Trump, China and the Depot, where we urged you to purchase the Home Depot March 24th 126 CALL for $2.88 and sell two (2) HD March 24th 119 PUTs for $1.40 each. Total debit on the trade was $0.08.


And now?


The long CALL is worth $2.10 and the short puts just $0.40 each. Sell off the former and buy back the latter for a net gain of $1.22 (1.30 – 0.08) on just $0.08 expended, or a spectatcular 1525% in two weeks!


We note, too, that this was another massive win on a Home Depot trade, our zillionth in the last three months (but who’s counting).


Good on you if you dove in large.




Our trade for the week is based on a concept called ‘sector rotation’, which is really just a fancy term for a game that Wall Street plays with stocks– and your money – every few months.


During a bull market, Wall Street uses the media hype machine to ratchet up the price of a single sector, X, to levels that are not realistic. It then takes profits and moves its money from sector X to sector Y. It tries to accomplish this without anyone noticing, because as in fishing, so too with investing – the early bird catches the worm. If everyone knew which bandwagon to hop on, Wall Street would have no one to sell to once prices became overbought.


The whole process is given the rather benign and somewhat plausible sounding title of ‘sector rotation’ – as if it were a perfectly unexceptional investment phenomenon – and nobody stops to ask questions.


Good if you can ‘rotate’ with the crowd, of course, bad if you decide to jump aboard late, when the pros have already started selling hard to the latecomers.


Today’s Spin


The charts below show two sectors that have taken divergent turns in the last while, the first which got rotated rather nicely of late, the latter not so much.


Have a look –


As the charts show, the utilities have far outpaced the financials since the bells of New Year’s began tolling. But after the entire sector (100% of her stocks) traded above their 50 day moving averages, and then started turning lower, the utilities, we believe, began rotating out of favor.


The financials, on the other hand, with the worst technicals of all the market’s broad sectors, are currently the logical place for inbound cash flows to aggregate.


We’re going to set the two against each other using a pair of ETFs, the iShares U.S. Utilities ETF (NYSE:IDU) and the ultra-leveraged Direxion Daily Financial Bull 3x Shares (NYSE:FAS). Here’s the two charted against each other for the last three months.

FAS IDU Technical

The stocks should move together, broadly speaking, but the financials will now begin to close the gap. And because we’re using FAS, we should see a strong outperformance.


We’ll buy calls on FAS and sell them on the utilities to make our money.

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Options Trader Elite recommends you consider purchasing two (2) FAS October 25 CALLs for $2.46 each and selling one IDU September 118 CALL for $5.10, for a total credit of $0.18.




Many happy returns,


Matt McAbby

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