In a market where volatility reigns, you pretty much have to throw out ALL conventional ways of trading.
Fundamental analysis doesn’t work, unless you are really thinking long term and can accept the drawdown that is likely to occur.
Technical analysis doesn’t work because it uses lagging data that, for the most part, often points to oversold conditions.
Even long-term patterns like the “election year pattern” aren’t working (although you could argue that it might just be working when looking the incumbents’ performance over this past year).
Regardless…
The right question that’s on the minds of all short-term traders is…
What stocks or ETFs are working the best in today’s markets?
Let’s take a look at these mavericks today. They come in two distinct types…
Type One: “Maverick Stocks” with Negative Correlation
Whatever the stock market has been doing these last four days, stocks in this group are not participating. In fact, these stocks are possibly even moving against the herd.
Now, I like this group because these stocks are more likely to follow some fundamental, technical, or seasonal pattern better than the crowded trades (trades with an overwhelming number of traders).
So how do you find negatively correlated stocks for 2016?
You could follow the Chicago Board Options Exchange (CBOE) Volatility Index (VXX) or short Exchange Traded Funds (ETFs) that are moving higher as the market as the market is moving lower.
But there are stocks out there that are correlating against the market and are moving higher.
I thought I might share this list with you to let you know that there are stocks out there that ARE going up when the markets are dropping. And these are the stocks that are beating to their own drums.
Here are the top ten negatively correlated stocks for 2016:
The higher the negative number, the more the asset shown above moves against the overall markets.
Now you’ll notice that the majority of this list consists of gold stocks and ETFs. This is because gold is slowly regaining its luster as the currency of last resort – for the first time in quite a while. And until the market stabilizes, I expect this to continue.
Type Two: “Maverick Stocks” with Non Correlation
We’ll want to use the same method to find non-correlated stocks that we used when looking for negatively correlated stocks.
So, we’ll take the last four days, for example, and look for stocks with what I call random correlation to the markets. This means that for the year 2016, we’re looking for stocks that are moving up and down – but not necessarily in lockstep with the marketplace.
These are ten extremely non-correlated (random) stocks for 2016:
I want to point out that the list above shows stocks that are moving regardless of what the overall market is doing.
But…
This does not mean these stocks aren’t going down.
It simply means that they aren’t moving exactly in sync with the daily overall markets. So, for example, if the markets moved 2% one day, then these stocks maybe moved 1% instead.
I also want to stress that the data above only reflects the first five weeks in the stock market. But these stocks and ETFs could offer a lower BETA risk than the market.
In case you’re unfamiliar with this term, beta is a volatility measure, and the stock market has a beta of 1.0. If a stock moves more than the market does, then it means that the stock has a beta above 1.0. Conversely, if a stock moves less than the market does, then it means that the stock has a beta below 1.0. Higher-beta stocks are considered riskier while lower-beta stocks are considered less risky.
So before following the methods our fundamental, technical, and seasonal investor friends are using, consider “maverick stocks” and ETFs, like the ones I’ve shared with you above… these are the ones that could help you the most in a troubled market.
Your Trading Lesson Summary
We’ve talked about how powerful the bull put spread, the bear call spread, and the iron condor are when the markets are slightly moving upward, downward, or don’t move at all. But in troubled trading times like these, there are stocks and ETFs that don’t move the same way as the markets – and possibly move against them. These are the two types:
- Negatively-correlated stocks or ETFs
- Non-correlated (or random) stocks or ETFs
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Stay safe-
Good trading,
Tom Gentile
