It’s that time of year again… time for the most remarkable trade of the year. Here are the rules of this simple trade:
- Buy the Dow Jones Industrial Average (DJIA) at or near the closing price on October 26th.
- Use a 9% trailing stop on the closing price. If the DJIA closes below its 9% trailing stop then sell it the next morning.
- If you don’t get stopped out then close the trade at the market close on January 10th.
Going back to 1950, this trade has lost money only 6 times. 61 out of the past 67 years this trade has been profitable. That’s a 91% win rate. The average profit has been 5.7% and the average loss has been 6.7%.
Every year I am confronted with this trade and every year I have the same reaction – “There’s no way this trade can work again this year.”
I had the same reaction last year when I wrote about this trade. Last year at this time the DJIA was in the seventh year of this extraordinary bull market. It was sitting at right about 18,000. Donald Trump and Hillary Clinton were scratching and clawing at each other as they approached the finish line of the election.
It wasn’t a time of extreme optimism.
Yet, the 2016 – 2017 version of this trade gained 9.7% in the two and a half months that this trade was open. Even with Trump’s shocking win, the DJIA never even got close to the TradeStops Stock State Indicator (SSI) Yellow Zone.
Today the DJIA sits above 23,000. It’s up nearly 30% since this time last year… and it still hasn’t dipped into the Yellow Zone. Here’s the latest TradeStops SSI chart:
I tell you all this in part because it is an opportunity to make a great trade with a great reward-to-risk ratio. But I’m also reminding us all, myself included, that successful speculation has almost nothing to do with our opinions and our feelings about what the future might hold.
Nowadays, I actually enjoy it when my opinions and feelings conflict with the data. I love being “wrong and long.” It’s not always comfortable but it is profitable and even rather amusing when you look at it in the right way.
Is the DJIA likely to close higher than the 23,401 close it made yesterday (the starting day of this trade) without suffering a correction of more than 9%?
I can give you all kinds of reasons why this trade won’t work this year. I’m probably more skeptical of the trade this year than I’ve been in the past 10 years. But 67 years of history says that the odds are better than 9 out of 10 that you can make 6% on that bet in two and a half months.
I’ll take that bet,
Richard Smith, PhD
CEO & Founder, TradeStops