This Graph Is Your Ticket to Knowing a Sector’s Next Move
The Dow dropped as much as 500 points Tuesday… before recovering much of the decline.
The S&P 500 and Nasdaq took similar heat, then closed off their lows.
Then yesterday, the S&P 500 fell over 1%.
And as I write this morning, it’s set to open close to 1% lower.
There’s a lot of volatility and uncertainty in the markets right now. It’s easy to see why.
COVID cases are on the rise again, and even making new highs in some areas.
Counties across the U.S. are going back under emergency status due to hospitals filling up…
New Zealand is even back on lockdown after just ONE locally transmitted case was discovered.
An extreme measure, no doubt…
But what this all shows is we’re still not done with COVID. And being blind to this as a trader could seriously cost you.
Nothing Wrong With a Little Hedge
Here’s the thing…
Even if America manages to avoid a lockdown, other countries that don’t will be reducing their output. That would put a dent in global economic growth.
Our world has never been more interconnected. A decision to lock down a country in the south Pacific can cause ripple effects all throughout the global economy.
We’ve seen it already in the supply chains. Delays for everyday products, from computer chips all the way to even trash cans, are just the tip of the iceberg.
I’m not trying to ring the alarm bells right now. Mike and I were cautiously bullish on our monthly outlook, just two weeks ago. That stance hasn’t changed.
But I’m also not blind to the caution signs popping up around the world.
It was a key reason I recommended a hedge here in True Options Masters on August 5.
That put option trade I shared with you, on American Airlines (NYSE: AAL), is already up 40% in just two weeks, as of this writing.
I’ve been adding some bearish trades in my premium Quick Hit Profits research service, as well. One of them is up as much as 85% in just eight days.
The next sector I’m targeting for a bearish trade is all based on the Relative Rotation Graph (RRG) I showed during our monthly outlook.
This time, it’s the financials that are most vulnerable.
The RRG’s Next Bearish Target
In our Monthly Market Outlook, I pointed out the energy sector was poised for gains over the next few days. While XLE did climb over 3% a couple weeks later, it’s now down 1% since I made that call.
So it’s time to look for new opportunities.
With everything going on, you don’t want to miss out on the bearish trades right now. Consider this a mid-month freebie.
In a couple of weeks, I think we are going to have some excellent bullish opportunities to highlight on our monthly call.
For now, financials — specifically the Select Sector SPDR Financial ETF (NYSEARCA: XLF) — are what I want you to watch.
XLF has exploded into the leading quadrant over the past few days, but now the momentum is slowing. With the line on the RRG dipping, it is the first sign of a potential pullback.
If this is your first time seeing this chart, let me explain…
It’s divided into four quadrants — “leading” in green, “weakening” in yellow, “lagging” in red, and “improving” in blue.
All assets generally go through these four cycles on the RRG in a clockwise order. The further they get from the center, the more extreme their move is compared to the broad market.
We want to be bullish on assets as they cross from lagging into improving, and bearish as they cross from leading into weakening.
So right now, with XLF firmly in the leading quadrant, it’s time to start looking for the sector to weaken and eventually lag against the broad market.
For all I know, by the time we get around to September, financials could be back in the lagging quadrant making them interesting buys.
But with the sector extended into the leading quadrant, we are looking for a quick dip to take place.
So you can see how the RRG is such a useful tool. It basically spits out sectors that are likely to turn lower or higher.
But the RRG does much more than just look at broad market sectors.
It also looks at the stocks within those sectors. Take a look…
Everest Re Group (NYSE: RE), Wells Fargo & Company (NYSE: WFC), and Franklin Resources (NYSE: BEN) are the three stocks in the financials sector showing clear bearish patterns right now based on the RRG.
It’s all based on the rotation… And you want to be bearish on these stocks as they exit from “leading” and head back into the “weakening” and “lagging” quadrants.
Keep an eye on their price charts and look for key levels to get in on a potential downside move, as well as a point where you know to exit if the stocks manage to climb.
All I know is, volatility is picking up again and I don’t think we’ve missed the boat with more bearish trades.
It isn’t time to go all-out bearish, but threading these put options throughout your portfolio is a great way to make some short-term gains.
Chad Shoop, CMT
Editor, Quick Hit Profits
P.S. To get content like this in your inbox everyday, subscribe to True Options Masters. Click here and subscribe.
Investing has consumed my life since college. While double majoring in finance and economics at the University of North Carolina at Greensboro, I founded the university’s economics club, joined the finance club and participated in the Chartered Financial Analyst research competition to represent our school.