It’s Profit-Taking Season

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Today marks the start of “profit-taking season”… How last week’s seasonal trading picks shaped up… This weekend’s events impacted the most sentiment-driven stock in the market… Where Mike Burnick is seeing a screaming deal… And how he’s helping subscribers grab cash from the options market…

Why do we know that July and August are the hottest months of the year in North America?

If you asked an astronomer, they’d explain how you can observe the Earth’s orbit, which takes it closer to the sun during these months… and the tilt of its axis, which ensures the northern hemisphere is pointed toward the giant flaming ball at the center of the solar system.

But you could also reach the same conclusion the way our ancestors would have in pre-modern times:

You could just look back at history and say, “July and August have been hot, consistently, for thousands of years. And they will be for thousands of years more.”

When you start to really understand the simple but powerful phenomenon of seasonality, trading those patterns is a cinch.

Here in TradeSmith Daily, we put a lot of stock in seasonal data.

Because it’s all about observing ever-strengthening probabilities in unique cases over a long length of time. And the more market history you have to study, the more accurate patterns you’re able to find.

For example: Smack between the longer-term bearish trend for stocks between May and October, the first half of July is an unusual period of seasonal strength.

Take a look at our TradeSmith seasonality chart of the S&P 500 covering 74 years of data:

Since 1950, today, July 17, through the end of October has been where we see the worst of the seasonal trend. Markets have shaved off about a quarter percent on average over the last 74 years within this timespan, and just over half of the time.

But look just a little further back, from June 25 to now:

70% of the time going back 74 years, markets have returned almost 1.5% on average during this short span.

What’s the takeaway?

The last few weeks of market returns have been excellent… but it’s time to take some chips off the table… and prepare for a new bout of volatility to strike.

And regular readers have a great idea of what stocks to sell…

❖ Last week, we called out two seasonally strong stocks to own for five days…

If you’re smiling, it means you remember… and you bought them.

We looked at the past 20 years of market history to find the best S&P 500 stocks to own between July 10 and July 16.

After filtering out everything with a win rate lower than 70%… and ones where one or two large wins skewed the numbers abnormally higher… we came away with two names.

1. Exelon (EXC), which posts an average gain of 1.4% and a win rate of 75%.
2. CMS Energy Corp. (CMS), with an average gain of 0.7% and a win rate of 70%.

We didn’t see those gains. We saw gains that were much, much bigger.

From last Wednesday’s open through Tuesday’s close – our targeted holding period for these stocks – EXC gained 2.81%, chalking up another win. And CMS gained 3.57%, doing the same.

That’s about three times the gain seen in the S&P 500 as it broke out to new highs during the same time. Meanwhile, Nvidia (NVDA), the stock market darling of this year (and last), fell nearly 2% as the small-cap rotation took hold.

Did we have insider information on these two obscure companies? No.

We didn’t need it anyway – just the same thing everyone has access to: historical information.

The only difference is, we got our hands on that data, used our algorithms to harness its power, and reached an educated conclusion that EXC and CMS were great stocks to trade during that time span.

There are no guarantees in any strategy. So, we’re definitely NOT proposing that seasonal analyses like these will work 100% of the time. Keep that in mind as you trade, no matter how you do it.

❖ Yet another historic event occurred over the weekend…

Still riding the high of my wedding the night before, my wife, new brother-in-law, and I were dumbstruck by the news that former President Donald Trump was shot at a rally in Butler, PA – coincidentally, just a half-hour’s drive from my best friend’s house.

There’s not much I can add to the conversation that you haven’t already seen. It’s incredibly fortunate that Trump survived the shooting. It’s heartbreaking that an innocent bystander, firefighter Corey Comperatore, lost his life protecting his family from the shooter. And the fact we’re seeing political violence at this level is no doubt disturbing.

We’ve said before that politics are not our primary focus here in TradeSmith Daily, though we’re fully aware that politics and markets are two sides of the same coin. Understanding who’s most likely to win the presidency helps us navigate the markets well.

And to be clear, the odds of a Trump victory on ElectionBettingOdds.com are even higher in the wake of the shooting than they were after Biden’s disastrous debate performance.

How would another term for Trump impact the markets? That’s a tricky question. Trump’s lax tax policy is sure to remain in place, and a renewed tariff campaign especially on Chinese-made goods would be part of the mix, too.

Investors’ reactions to the shooting also give us some clues. The S&P 500, Nasdaq, and Dow all cracked new all-time highs, and small-cap stocks notably surged higher too. Even Bitcoin joined the party, rising over 13% from the Friday lows.

But if you want a “pure play” on a Donald Trump win, you have to delve into the murky waters of Trump Media & Technology Group (DJT).

Our first impression of the stock was that it was a bad buy – at least in business terms. Trump Media & Technology is a money-losing enterprise, with its flagship product being Truth Social, the niche social media website that has replaced Twitter (now X) for the former president.

That said, the stock does not move based on the underlying company’s performance. It moves based on how much people want to support Donald Trump. For example, DJT ripped over 25% higher on Monday as the consensus view took hold that Trump would be the next president.

As the likelihood of a Trump win continues to grow, it’s possible that this sentiment-driven stock will keep running. That makes it an interesting vehicle for speculation to the upside, especially through to the election.

But that’ll be the last word on speculation for today. Let’s switch gears into a strategy far more stable for the long-term investor.

❖ TradeSmith’s options income expert Mike Burnick recently wrote about a rock-solid value investment to consider now…

It’s a niche of stocks that doesn’t get a lot of love or limelight from the mainstream media. That’s because, by their very nature, these stocks are unknown.

It makes sense for that to be the case. Often, stocks are cheap because not a lot of people are buying them – no matter the quality of the business itself.

Mike recently wrote to subscribers of Inside TradeSmith about this very topic. And he laid out the three qualities of the best value investments in plain English:

1. Cheap: The asset class has plenty of upside potential.
2. Hated: Everyone has given up, so who’s left to sell it at this point?
3. Uptrend: That’s the heart of the matter: the bullish catalyst.

He goes on to say…

Plenty of asset classes are cheap and hated. Right now, that’s just about everything outside of the Magnificent 7. Well, everything else may not be “hated,” but certainly is unloved compared to the 7.

This means that even if you have an asset class with factors 1 and 2 pulling in your favor, you could still wind up sitting on dead money – or worse. Even cheap and hated assets can fall to an even steeper discount and get more despised.

So, even if factors 1 and 2 are present, you must be patient enough to wait for factor 3 to be in the mix for a true green light buy signal.

It can’t be enough for a stock to be cheap and ignored, or “unloved,” as Mike puts it. The stock also has to have momentum at its back. So, there’s some real strategy in picking the right value investments.

And right now, according to Mike, there’s a specific class of stocks that sport these qualities: Chinese stocks. Here he is with the analysis he shared with Inside TradeSmith subscribers…

After a domestic housing crisis that mirrors our housing and financial bust from 2008, regulatory crackdowns, and a trade war with the United States and now Europe, analysts have labeled China “un-investable.”

Well, apparently someone is investing money there now.

From the end of January through mid-May, Chinese stocks soared 25% year-to-date, about three times the gain of the S&P 500. Since then, Chinese stocks have taken a breather and pulled back a bit.

Some say the spring rally for China may have been a false start. But I believe there is staying power to the rally. And the recent pullback is a golden opportunity to buy. Because the truth is, Chinese stocks have a lot going for them right now.

Mike points out that China’s GDP growth and exports numbers have made recent upside surprises, the government has been easing monetary policy ahead of the U.S. Fed, and the stock market is plainly cheaper than the U.S. market.

As for how to trade it, here’s Mike once more:

There is one ETF that looks especially intriguing to me right now: Invesco Golden Dragon China ETF (PGJ). This fund is a great way to cash in on the potential upside in Chinese stocks with a single mouse click.

Unlike many China-stock ETFs, PGJ holds only U.S. exchange-listed American Depository Receipts (ADRs) of companies based in China. So, there are no Hong Kong-listed stocks here. They all trade on the New York Stock Exchange or Nasdaq.

Mike also shared a list of cheap, quality, uptrending Chinese stocks, but we’ll save that for paid-up Inside TradeSmith subscribers.

If you’re not already getting Inside TradeSmith, you can join any paid TradeSmith membership and it’ll be free with your purchase. Right now, for example, we’re running a promotion on our options income trading advisory, Constant Cash Flow – which also benefits from Mike’s insights.

Constant Cash Flow is based on a discovery that won two economists (Fischer Black and Merton Scholes) a Nobel Prize in 1997:

Yep, that’s what the Black-Scholes method looks like on paper, although TradeSmith has made it much easier for you to use.

If you know anything about Black-Scholes, you know it is essentially the best and most accurate forecasting model ever devised for any investment — EVER.

Nothing like it exists for stocks, bonds, real estate, commodities…

Only options.

If you’ve ever wondered why big Wall Street trading desks have such a huge edge… why they always seem to make money in any market… it’s because of that formula up there.

Here at TradeSmith, its power is available to you through our Probability of Profit tool. In Constant Cash Flow, Mike Burnick oversees our Options360 system to provide you a high-probability option trade – each and every day.

For instance, you can join now and get five trades in a row: Monday through Friday.

And those trades will have such a high Probability of Profit that we’re willing to make you this simple, straightforward guarantee:

The first five (5) trades we recommend in the coming week — starting next Monday to Friday — will ALL be winners… Or you will receive a full cash refund for your subscription fee.

Click here to learn more and get started.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith