How to Trade the “Dog Days” of Summer

Last week began with some back-and-forth action as analysts and investors nervously awaited a full earnings slate.

Stocks rallied on news of a new stimulus package from the U.S. government. I get it. After all, the assistance it can provide for unemployed workers as well as the help for businesses and schools will be a godsend for some…

But the move didn’t stick. Stocks retreated. Then they found their rally caps once again following the Fed meeting minutes — only to tank the day after. Then, investors thought bang-up tech earnings would vault the averages higher into the weekend. But the move didn’t stick, and stocks once again found lower ground after opening in the green on Friday morning.

I know how choppy action like this can frustrate investors. But it’s totally normal. Remember, we’re in the dog days of summer. The market’s always a little wonky this time of year, even when the world’s not dealing with an unprecedented pandemic.

Speaking of unprecedented, the flow of funds from the Fed is unprecedented and cannot be ignored.

Nothing has changed except the fact that there’s MORE money on the way to stimulate the economy and markets.

Don’t let the summer chop lead you into kneejerk trading decisions. We’re in the right place at the right time… by being long, any bullish breakouts will pay out big time.

Keep it In the Money,

Alan Knuckman

Alan Knuckman
Editor, In-The-Money

Chart of the Day: No big rotation yet.

Greg Guenthner

Over the past several weeks, we’ve discussed how bull markets are built on rotations and traders move from one hot group of stocks to the next in search of quick gains.

But there’s been talk of a bigger potential rotation in this market — a move away from the red-hot tech names that have fueled the market’s incredible recovery off its March lows.

While we’ve had some weeks where the Nasdaq has given up ground to the Dow and S&P, last week’s blowout earnings from big tech — and the market’s reaction — shows us that investors aren’t finished with these stocks just yet.

I already showed you how semiconductors streaked to new highs to finish the month. Household name stocks like Apple and Facebook followed their lead, posting new all-time highs last week as well.

Here’s the result of these moves:

INDU

You can see clearly how the Nasdaq once again extended its summer lead over the Dow industrials during the final week of July trading. Any way look slice it, tech is still king in this market.

Of course, it’s also important to remember that rotations can be brutal if you aren’t paying attention. But if you know where the money is flowing, there’s a good chance you can avoid some of the short-term pain and continue to book profits along the way. It’s crucial to learn how to take profits on the big rips higher. Remember, we’ll always see some unwinding and profit taking when the market gets a little frothy. That gives us a chance to take a step back and reevaluate the risk-reward for new trades.

Trading Tip of the Day

July presented some difficult trading moments — even for seasoned traders.

Yes, we can use volatility to our advantage in many situations. But choppy market action can make entries and exits a little more difficult. In fact, I’ve seen many novice traders lose more money in a sideways market than one that’s in freefall…

Thankfully, there are two things you can do to come out on top, even when the market’s not fully cooperating with your plans. First, you can trade smaller. Buy half of the shares or contracts you normally would for any given position. That way, the market’s choppy action is less likely to shake you out of your position.

Next, you can adjust your timeframe now that you have a more appropriate position size. Giving your trade time to work will help you capture more predictable moves, instead of attempting to snipe unpredictable intra-day moves.

— 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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