A Great Tool for Catching Major Market Moves
On Friday, I noted that capital was beginning to rotate into new sectors in the market.
If you missed that article, rotation occurs when capital begins to move en masse from one sector to another. Typically, this involves money shifting from a sector that has been leading to one that has been lagging.
In our recent market climate, this means money shifting out of tech stocks and semiconductors and into things like cruise lines, theme parks, financials, and the like.
The thing about rotation is that it is difficult to see on a standard chart. As a result, many individual investors miss out on these shifts… which means missing out on massive opportunities.
Take a look at the below chart showing the FANG companies (Facebook, Apple, Amazon, and Google as depicted by the red line) vs. JPMorgan (JPM).
It is obvious that big tech is where you want to be. Look at the massive difference in performance over the last two months!
However, this chart is deceiving.
It compares two different sectors with two completely different share price values. As a result, you’re not really measuring performance cleanly because there are two completely different Y–axes.
Look what happens when you change this chart from showing prices to showing percentage performance gains, starting with March 23, 2020 (the date the markets bottomed).
Here again, FANG stocks are in red, JPM is in black.
Suddenly, the outperformance isn’t that dramatic. In fact, it’s clear that JPM has gained DRAMATICALLY more since mid–May. While the FANG stocks have been moving in a gradual uptrend, JPM has suddenly EXPLODED upwards.
Learning to Outperform the Market
Finally, there’s another trick I use to catch major rotations, called “ratio work.”
Ratio work consists of comparing the performance of two asset classes by turning them into a ratio.
Let me give you an example.
Below is a chart of JPM compared to the FANG stocks. When JPM outperforms FANG stocks, this chart rallies… and when FANG stocks outperform JPM, this chart falls.
Looking at this chart, it is clear that FANG stocks outperformed JPM from late 2019 until May 2020 (the chart was in a clear downtrend). Then, this suddenly reversed in mid–May, with JPM DRAMATICALLY outperforming FANG stocks.
Using this kind of ratio work, you catch major rotations when they start.
I did precisely this in late May, alerting subscribers of my Strategic Impact newsletter that we were about to see several investments explode higher based on the economy reopening.
One of them is already up 28%. The other is now beginning to catch a major bid as well.
To learn more about investment ideas like these and secure your opportunity to see how to profit… click here.
Editor, Money & Crisis