For the past 2 years, the same exact pattern in U.S. stocks has been repeating over and over again…
It’s always the same setup, yet everyone seems shocked when it happens again.
Today, stocks are once again surging to ATHs, squeezing short sellers and leaving panicked investors who sold during volatility with regret.
The Great Sell-Off (and why it’s mistimed)
Just last week, investors withdrew a record $3.46 billion from global equity funds.
This mass withdrawal occurred right before the stock market broke out of a multi-month consolidation range, continuing its strong uptrend.
It’s a classic case of investor psychology working against the crowd.
Our Contrarian Approach
We’re proud to say we didn’t flip bearish during this volatility.
In fact, we saw these dips as buying opportunities:
- We suggested going long on stocks to our clients
- We Initiated many trades that are now up significantly
For example, our long position in NRG Energy ($NRG) is already up 18% since initiation.
Find all our Active Trades here.
Why did we feel confident being long? Oil prices.
The Oil Price Signal
Leading into every market bottom since 2022, U.S. oil prices were falling.
This signal allowed us to get aggressively bullish in late-2023 and April 2024.
Over the last few months, we’ve seen one of the largest drawdowns in oil prices in recent years.
But Isn’t Falling Oil Bad for Stocks?
Not always…
Here’s why this time has been different:
1. Junk Bonds Are Thriving:
The high-yield bond ETF is making new 52-week highs consistently since July 2024.
This is not typical behavior before a recession.
Compare this with the 2008 financial crisis, where junk bonds were declining.
This signaled significant trouble ahead for stocks.
2. Analyst Optimism:
Analysts are increasing their estimates for S&P 500 earnings.
This suggests good guidance from companies.
S&P 500 companies don’t seem too worried about a recession yet.
The Interest Rate Effect
Falling oil prices have also significantly influenced bond yields.
In a growing economy, decline in oil prices have led to drops in U.S. interest rates.
This has happened repeatedly:
- Nov 2022
- March 2023
- Nov 2023
- May 2024
- Aug 2024
Each instance has propped up stock market valuations.
This is clearly visible in the S&P 500 PE ratios.
That’s why when the market fell by around 10% in Aug 2024, we sent out a buy alert on SVIX to our clients.
This resulted in a quick 20% trade on the day itself, as the markets rebounded swiftly.
Here’s a snapshot of our current performance:
- 18 ongoing Active Trades
- 16 are up significantly
- Only 2 at a slight loss
- Average profit in 2024: 16%
- Average loss in 2024: 3.7%
Click here to access all our Trades and Investment Analysis.
The Recession Question
Despite our bullish stance, we’re not ignoring recession risks:
- The labor market has begun to weaken
- Leading economic indicators are in poor shape
This type of decline in leading indicators is typically only seen before or during recessions in the United States.
However, a key element is missing for a U.S. recession: a clear shock to the economy.
Historically, recessions have been triggered by distinct events:
- Oil shocks
- Housing bubble bursts
- Stock market crashes
While we’re seeing strength in the stock market, it’s crucial to remember that the economy isn’t bulletproof.
We’re waiting for the other shoe to drop.
Until then, the economy could continue to hum along, and stocks could keep getting more expensive.
Ready to Profit From These Markets?
At Game of Trades, we trade ETFs, stocks, commodities, crypto, and bonds with typical holding periods ranging from a few days to several weeks.
Want access to our full range of Trade Ideas?
- Grab a subscription to join our community.
- Get our detailed analysis and actionable trade ideas.
- Check our track record for free on our website.
Subscribe to our YouTube for more in-depth analysis and Follow us on X for real-time market updates!
Read more: The Damage is Irreparable…
