I’ve written a lot about Chief Investment Strategist Adam O’Dell’s new Home Run Profits strategy lately, and there’s a good reason for that.
While the strategy has proven to work well in up markets, sideways markets and even down markets, there have been times and places that this strategy is ideal.
Adam can’t just manufacture a triple-digit winning trade on command. He’s good, but he’s not that good. The right conditions have to be in place.
And all signs point to those conditions being in place in the coming weeks.
The January Effect
I’ll start with the calendar. The “January effect” is a seasonal pattern that market technicians know well. January tends to be a strong month in most years. The average January gain in the S&P 500 is 1.8% — vs. 0.7% in the other 11 months.
No one really knows why this is the case.
It could be the optimism that always comes from the start of a new year.
It could be buying pressure from investors dumping new money into their IRAs.
It might be due to buying patterns from institutional investors. Or it could be a combination of all of the above.
But for whatever the reasons, January tends to be a good month. And for a momentum-based strategy like Adam’s — which looks to buy high and sell higher — that makes January an ideal time to start.
The reasons go a lot deeper than the January effect, however.
Long-Term + Short-Term Momentum Trading
Adam’s Home Run Profits system looks for scenarios in which long-term momentum trends and short-term momentum trends converge.
If you’ve ever tried trading on your own, you know why this is a big deal. A stock with favorable long-term momentum can still be a terrible trade in the short term.
Think of Elon Musk’s Tesla Inc. (Nasdaq: TSLA). Sure, it’s up hundreds of percent this year. But over the summer, it lost a third of its value in a little over a week.
Likewise, short-term momentum trends can be brief and fleeting. It can be hard to know with any certainty if a move is a blip or the start of a real trend.
This is why Adam looks for convergence between short-term and long-term momentum. He’s able to filter out a lot of the noise, setting you up with higher-probability trading opportunities.
We’re starting to see more and more of those opportunities lately, which is why I’m banging the drum so loudly.
I’m the first to admit that I don’t know what kind of year 2021 will be. The optimist in me has to believe it will be a better overall year for humanity. But I’m not so sure about the stock market.
As I wrote yesterday, the S&P 500 is well into bubble territory at today’s prices. By my favorite quick-and-dirty valuation gauge — the cyclically-adjusted price/earnings ratio — the market is the most expensive it’s been since the late 1990s.
By other metrics, such as the price/sales ratio, today’s market is even pricier than at the 2000 blow-off top of the 1990s tech bubble.
Expensive stocks can always get more expensive, of course. That’s the essence of a momentum-based strategy of buying high and selling higher. But it’s also a lousy time to initiate new buy-and-hold positions.
I’d prefer to take my chances trading, looking to take short-term profits along the way.
And that’s exactly what Home Run Profits looks to do. It’s performed in up markets, sideways markets and even catastrophically bad down markets. So, I’m betting it will weather whatever 2021 can throw at it.
To be a part of our first-of-its-kind Home Run Profits event on January 12, click here now to register.
Money & Markets contributor Charles Sizemore specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business. Follow Charles on Twitter @CharlesSizemore