Investment analyst Chad Shoop presents a trading strategy that’s proven to be a highly successful way to approach the Dow Jones Industrial Average.
HSBC sent a client a letter earlier this week warning of a “red alert” — meaning that stocks are at risk of an imminent sell-off.
This approaching sell-off is something I have been talking about for months. And now, many other analysts and investors are beginning to acknowledge it as well.
Sure, there are some who haven’t jumped on the bandwagon yet, which is what helps keep the market afloat for now.
But, in the meantime, I have a way for you to conservatively trade your portfolio regardless of what the market does…
It’s called the Super 8 Trading Days Cycle.
All you have to do is own stocks on two separate occasions each month, covering our Super 8 days, and you could outperform the general market (specifically the Dow Jones Industrial Average, on which the study was done).
You simply buy the Dow Jones Industrial Average on the days I lay out below and sell on the respective dates. You could end up beating the market! For example, you would have notched a 9.85% return in 2008 — when the Dow tanked over 30%.
Let me explain how it works.
The Super 8: The Best Days to Trade Stocks
We’ll start with the first batch of the Super 8 days — the first two and the last three trading days of the month.
The very first trading day of the month is actually one of the strongest days for the Dow Jones Industrial Average overall.
From September 2, 1997, through May 15, 2015, the Dow added over 49.9% of its price increases on the 213 first trading days of the month. The other 4,242 trading days made up just 50.1%.
When adding the last three trading days of the month to the first two, it creates a five-day trading window during which investors can expect outperformance. Therefore, you would look to invest ahead of and exit at the end of this five-day span.
The rationale behind what makes these days outperform the rest is simply a typical monthly resetting of the books by institutional traders, causing an influx of cash into the blue-chip stocks that comprise the Dow.
There’s another explanation as well — payday.
Millions of Americans receive their paychecks weekly, monthly or bimonthly. In this case, twice-a-month payments are the most common, making it inevitable that many of those paychecks hit at the beginning or end of the month, and also in the middle — what we call the midmonth bump.
When employees receive their paychecks, most have a 401(k) contribution that is automatically made, giving millions of dollars to fund managers who in turn look to invest that capital — thus resulting in the ninth, 10th and 11th trading days of the month outperforming the rest.
Here’s how it looks on a sample calendar with the Super 8 days shaded in green:
By trading on just these eight days, you would have outperformed the Dow in six of the past nine years, coming up short in 2009, 2013 and 2014.
Typically, it outperforms when stocks are falling.
For example, trading just these eight days each month in 2008 would have handed you a 9.85% total return — versus a 31.79% loss holding the rest of the month. In fact, out of the nine years examined, the rest of the month (excluding those eight days) were negative in 2007, 2008, 2011 and 2015; yet the Super 8 days were positive by double digits on average!
That’s a remarkable return as broad markets struggle, which is what we expect to happen this year and next.
So if you’re worried about a 2008-type of scenario — or worse — focus on the Super 8 days. Buy before the last three trading days of the month, and close out after the first two trading days of the month. Then jump in ahead of the midmonth bump to benefit from the Super 8 days.
The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) closed at $181.29 on Friday, up $0.45 (+0.25%). Year-to-date, the only ETF that tracks the DJIA has risen 4.2%.
This article is brought to you courtesy of The Sovereign Investor.