If you aren’t betting on a big year-end market rally, you should be. The force is with you.
More to the point, the force is with the market. It’s an extraordinarily powerful force that investors don’t see, and the financial press isn’t writing about.
But it’s here, and it’s gathering speed like a hurricane crossing the warm waters of the Atlantic.
You don’t want to get out of the way of this force of nature; you want to ride it all the way to the bank.
The Market’s Self-Fulfilling Prophecy
The most powerful force driving the stock market is always momentum. There’s nothing stronger. Momentum can turn profit-taking into a selloff, and turn that selloff into a crash in just a few days or over months and quarters.
Fortunately, it works to the upside too.
In a very real way, momentum is self-fulfilling. As the stock market goes higher, it generates its own momentum as investors come off the sidelines and portfolio managers apply idle cash, as well as sell other asset class investments like bonds, and put them to work in stocks. That’s been the case all year, propelling the market up more than 15%, so far.
For lots of good reasons, I think buying momentum will pick up in November and December.
Portfolio managers of all stripes are measured against the market. Whether you’re invested in mutual funds or hedge funds, you want to know how you made out at the end of the year compared to what the market did for the year. If the market’s up 15%, you expect your funds to be up at least that. But really, you expect them to be up more than the market because you’re paying for active management.
Of course, money managers are measured against industry benchmarks like the S&P 500. They know that if they aren’t beating their benchmark, then they’d better load up on the big-name winners before year-end to both raise their performance and show investors that they owned highfliers, even if they didn’t own them most of the year.
The year-end buying of stocks that have outperformed is called window dressing.
This year the big outperformers are a narrow group of stocks, led by technology stocks that include Facebook Inc. (NASDAQ: FB), Amazon.Com Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), Netflix Inc. (NASDAQ: NFLX), and Alphabet Inc. (NASDAQ: GOOG) – the FANG stocks – as well as Microsoft Inc. (NASDAQ: MSFT). Other big movers include Boeing Co. (NYSE: BA), Visa Inc. (NYSE: V), Caterpillar Inc. (NYSE: CAT), and UnitedHealth Group Inc. (NYSE: UNH), which are in the Dow Jones Industrials Average along with Apple and Microsoft.
Portfolio managers are going to be doing a lot of year-end window-dressing with these names.
But what makes this year so special is that the big movers are high-priced and huge capitalization stocks.
May the Force Be With You
In capitalization-weighted indexes like the S&P 500, the Nasdaq Composite, and the Nasdaq 100, highflying big-cap stocks have a huge influence. The Dow, being price-weighted, is heavily influenced by high-priced stocks.
Because this year the big movers happen to be the most influential stocks in their various indexes, it’s easy to buy that handful of companies and look like you’re a genius.
But the momentum gets even better.
Not only are the fistful of outperforming stocks influential in their indexes, but they also take up the largest space in all the top-performing ETFs. These are what so-called “passive investors” buy to mimic the market without having to pay managers to try and beat it.
As the year-end buying of these big leadership names picks up speed, the averages that they’re influencing and the ETFs they’re a big part of are all going to go up more. That’s going to increase momentum and lift all the benchmarks and all the big ETFs.
And that’s going to get more investors off the sidelines.
There’s going to be a self-fulfilling, momentum-led, year-end rally you’re not going to want to miss.
Statistics already prove we’re headed for a good rally. Since 1950, there have been 17 years when the market’s been up 15% going into November. The market jumped another 4.9% in the last two months of those years 75% of the time.
But that’s just the backdrop. Up front is the phenomenon we’ll enjoy this year because of the big-cap, high-priced stocks being the momentum leaders and making more buying of them self-fulfilling.
One way to play this, for potentially huge gains, is to buy out of the money call options on triple leveraged benchmark ETFs that track the popular indexes led by all these momentum-driven stocks and are leveraged to go up (in percentage terms) three times as much as the indexes themselves.
By buying slightly out-of-the-money calls, you can leverage your gains up even more while still limiting any potential losses to just what you pay for those calls.
Another way to play this is by following the recommendations of someone who finds profitable momentum plays every week. The latest numbers I’ve seen from Keith Fitz-Gerald, who follows momentum more closely than most, show that he’s averaging weekly gains of 313% (including partial and full closeouts).
To say that there’s a lot of money to be made there is an understatement. You can click here to learn more about how Keith finds these trade recommendations.
In the meantime, watch how the momentum builds in these last weeks of the year. And don’t say I didn’t warn you.