Patience = Profits

Summer will be here before you know it. Personally, I’ve been looking forward to the maiden voyage on my newly restored 1952 Chris Craft.

But I received some bad news this week. The painstaking sanding of nearly 75 years of punishment on the lacquer and mahogany is taking longer than we initially expected. It looks like I’ll have to wait until August before I set sail…

boat

They don’t make ‘em like they used to…

But time is my friend — not my foe. As with most big projects, it takes time to do things right.

Patience is a virtue that I have been slow to develop. There’s an old trading floor joke that goes something like this: What’s the difference between a bond and a bond trader? A bond matures!

There’s plenty of truth to this joke. After all, traders aren’t known for looking at the big picture. They’re too busy profiting from the here and now.

After nearly three decades in the markets, I hopefully do not look like an old grizzled trader — though I definitely am one. The days of trying to be a market hero have passed. Living to trade tomorrow is paramount at this point…

The strategy is as much a part of success as any stock selection. Putting probability on my side with options has let me evolve into a patient pursuer of profits.

Yes, patience can lead to incredible trading profits. Use time as an asset —buy more time than you need just in case a trade develops slowly. Buying enough time to be right is a manta I have mastered over the years. You can, too.

Turning to the markets, stocks have held strong. The S&P 500 is solidly above the key 2,800 level we’ve discussed at length in this letter. That’s the midpoint from the big drop back to the top…

Meanwhile, the tech takeoff has led the way higher with other market measures set up for tests of multi-month highs, confirming the next leg upward. As you’ve probably guessed, patience has paid off for the bulls!

Keep it In the Money,

Alan Knuckman

Alan Knuckman
Editor, In-The-Money

Chart of the Day: Streaking Small-caps

Greg GuenthnerTech stocks continue to get most of the credit during the miraculous recovery rally — and rightly so. The mega-cap tech names have maintained a crucial leadership role in the market’s rise off its March lows.

The Nasdaq Composite posted another banner week following a brief consolidation period. The tech-heavy index gained approximately 6% last week, pushing back into positive territory for the year.

But there’s one unlikely group of stocks that’s hot on tech’s heels: small-caps.

The iShares Russell 2,000 ETF (NYSE:IWM) survived its first snapback test after being violently rejected from the rally’s key 50% retracement level. A strong comeback this week had now put the small-cap ETF back on track.

iwm chart

IWM’s performance once again topped the S&P 500 and the Dow last week. But small-caps still have a lot of ground to make up. Despite its strong comeback off its March lows, IWM remains down more than 20% year-to-date. As I noted last month, we’ll need to see a sustained recovery before we can sound the “all clear” on a bigger small-cap rally.

Trading Tip of the Day

Miraculously, the markets have managed to make it through the first weeks of earnings season virtually unscathed. Yes, some of the results haven’t been pretty. But overall, some positive surprises have helped push the averages higher when many investors were expecting the worst.

This brings to mind a particularly useful Wall Street adage: Never short a dull market.

The major averages slipped from their recovery highs to close out April trading — but not enough to trigger any serious panic. In fact, the major averages all finished up about right where they started in the two weeks leading up to last week’s rally.

A weary trader might have easily convinced himself that the calm before the earnings storm would be a perfect time to bet against the market. But without any confirmation of a breakdown, it’s easy to see how a big downside bet would have ended in disaster.

— Greg Guenthner

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Alan Knuckman

Alan hails from the home of options trading in Chicago, where he began working as a clerk on the floor of the Chicago Board of Trade (CBOT). Beginning with his days on the floor, Alan’s worked with all aspects of the options markets for the past 25+ years.

Transitioning from a clerk to a floor...

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