By now I’m feeling quite vindicated by the market’s action. Having written two weeks ago that the current market conditions were unlikely to produce a significant pullback, I am actually quite surprised that one did not occur. The uncertainty regarding the financial fate of the European Union is the stuff large-sized, bold-face headlines are made of. This is more than ample fuel to stoke the fears of the worst kind of bear markets. And yet the market is finding ways to behave optimisitically. Simply put, the market doesn’t want to go lower right now—not if it doesn’t have to.
So if you are looking for that trade that completes you; or perhaps you just want some publicly-traded company to step up and help you…help them, then put on your best Jerry McGuire imitation and say Hello to a sweetheart trade you’re quite familiar with already. Let me reintroduce you to the financial sector.
Are we there yet?
There are several indicators that confirm when a market has put in a bottom. One such indicator is the rotation of business sectors. Business cycle watchers enjoy pointing out that the Financial sector tends to lead the indexes out of a bear market. Over the past ten trading days, the financials have moved from among the laggards to the leaders. Within this sector two stocks, Goldman Sachs (GS), and Key Corporation (KEY), show particularly notable relative strength. These stocks have outperformed the market and the sector since the beginning of the fourth quarter. Additionally Visa (V) and Mastercard (MA) haven’t really even been fazed by the past three months’ bearish tilt.
Plan your trade and trade your plan!
As with any trade, it is important to have a plan, define your risk and regonize how to take your profits. The whole point of buying financial stocks at the time of a potential market turnaround would be to attempt to buy early in a trend that may run for awhile. So perhaps a trailing stop approach would work best with these. An excellent rule to follow for trailing stop loss order is to simply set the stop loss twice the amount of the average true range. This process may stop you out once or even twice, but if the trend runs long, one of three trades should win and produce gains large enough to outpace any losses you face.
On the other hand, if you simply do not have the patience to let the trade slowly develop and build up, you can consider setting a stop loss and taking profits at a point equally distant from your entry. Meaning if you set a stop-loss order for $2 lower than your entry price, you take profit if the stock rises $2 per share. Once you have done so, you look for another entry and repeat process. This process should produce better than 50% winners for as long as the trend continues.
Either way you choose to plan your trades, it is important that you stick with your rules. Human emotion isn’t terribly useful as an indicator of success in trading. Enjoying romance in movies…maybe.