Hey There Income Hunters,
Over the weekend, I met up with my kids and family at Disney World. (And I’m now hoping for a huge trading week to make up for those expenditures!)
No, it was a blast, and the great thing is the cousins and siblings are older, so we spend most of our time at Epcot, globetrotting and sampling each country’s choice beverage and appetizer …
The one ride I will go on Avatar. If you ever get the chance, check it out.
I bring this up today, because I want to talk about your trading avatar. If you were in a trading video game what type of trader would your avatar be?
Would you buy and hold shares that return nice income over time?
Would you be a contrarian trader and dollar-cost average anticipating a reversal in trend?
Or maybe you would look to use options to get as much leverage as possible and be a swing trader.
It’s really important to be comfortable with your own style of trading … Perfecting your process is the only way you can be consistently successful.
Today I am going to share my style and my process — and results.
3-Step Process to Massive Profits
1. Know the Growth, Inflation and Policy Conditions you are Trading …
There are 4 phases to the market …
- Accelerating Growth & Deceleration Inflation (Goldilocks)
- Both Accelerating Growth & Inflation (Hot Economy)
- Slowing Growth & Accelerating Inflation (Stagflation)
- Slowing Growth & Inflation (Recession)
The phase of the economy dictates policy …
- The Fed and US government always react
- If you get the phase correct you can front run policy
- Get ahead of policy and you get ahead of investors
- That is how you maximize your opportunity
2. Optimize your Portfolio Based on the Economic Phase
- Phase 1 demands long equities, credit, commodities short bonds and US dollar
- Phase 2 is even more bearish for bonds, and you add REITs and utilities to the short. Long energy, tech and financials
- Phase 3 — long gold, commodities, bonds and short financials, telecom and materials
3. Select Individual Stocks and Specific Qualities for Each Phase
- The phase dictates specific qualities to include. For example, Phase 2 is growth, high beta, small caps, while Phase 4 would be low beta, dividend yield, quality, defensives
- I use a simple discounted cash flow model to find stocks that are either undervalued or overvalued depending on long/short action
Winning Trading Strategy
Use call and put option spreads for three reasons
- By being long an option and short an option, you mitigate the big swings in volatility and time decay can inflict on options prices.
- Spreads give you awesome low risk/high reward ratios of 100+ %.
- They minimize the amount of time you spend managing the risk in your positions for two reasons …
– When the market moves against you on a bull or bear spread, your limit to a max 20% loss.
– While when it expires above your target price your return can be 10x your loss.
Example of Process and Execution
At the end of September, it was time to assess the Q4 growth, inflation, and policy conditions
This is important …
I put more than 50% on Bond trends via iShares 20+ Treasury Maturity Bond ETF (Ticker: TLT) as my input to which phase of the market we are in …
Second, I look at financials via the SPDR Select Sector Financial ETF (Ticker: XLF) …
Let’s take a look at the conditions for the past 3 quarters and forecast the 4th quarter …
So, to set this up for you … I closely follow the financials, bonds, and commodities because they are leading indicators on where growth and inflation are going …
Equity indexes are not great forecasters. You need to break out the sectors. Now, we know commodities trended higher most of the year so we will assume inflation is trending higher throughout …
You can check the phases I included previously and notice a few key observations:
- The only phase when financials trend higher is phase 2
- The only phases bonds trade lower is in phase 1 and 2
- So, it is obvious the economy was in Phase 2 for the first two quarters
- Next, bonds started trading higher and financials chopped and ended lower for the quarter ..
- This is a slowing growth higher inflation quarter (stagflation)
Griff’s Picks for September
With a Phase 2 to Phase 3 transition playing out in September, I focused on trading a short strategy in TLT and a long strategy in the SPDR Select Sector Energy ETF (Ticker: XLE) …
Bring It Home
That brings us to forecasting Q4, which is fairly easy when you look at the underlying trend of inflation and financials.
General consensus had Q4 all wrong. The fear of a deep correction was ignorant to the fact that the funding markets are super liquid and strong. There is no deep correction coming any time soon.
We are heading back to accelerating growth and inflation and the market has been trading based on slower growth …
Focus on buying tech, consumer discretionary, industrials and energy on dips in the next couple of weeks to participate in a rally to new highs in S&P.
Keep your thoughts and ideas coming. Together we will crush it in Q4.
And as always …
Live and Trade With Passion My Friends,