The stock market is wobbling. It is no surprise what is happening. We had a breakdown two weeks ago and nothing but a weak bounce off of the 200-day moving average driven by robot buying last week. But that doesn’t create real rallies.
People want me to say its just going to go up forever and make them rich, but the reality is that this market is becoming very difficult for many former leading sectors, but pair trades is an excellent way to lower your risk and make money at the same time.
Many stocks have had nasty reversals lately. For instance, most of the dope stocks made new highs the other week and are now dumping on big volume.
Take a look at Canopy Growth for example.
Canopy is the leading dope stock in terms of market cap and is now falling on big volume.
Yesterday it dumped for over 11% and now has a broken technical analysis stock chart.
However, let me show one stock that actually still has a solid chart.
It’s the stock of Standard Diversified – a giant tobacco and vaping company. When you see someone vaping odds are Standard has a piece of the action. You can’t say the same thing if you go to a concert and you smell the nasty dope in the air when its come to Canopy and that is one difference between the two companies.
But it’s the charts that matter for trading.
SDI is still acting solid and consolidating even while the stock market has been weak this month and stocks like Canopy are dumping.
Pair trading is when you short one stock and go long another.
You bet against the stock that is acting weaker than the market and bet with the one acting stronger.
It’s a way to manage your risk in the market. When the market falls the stocks you are betting against tend to fall more than the market does.
And when it goes up your strong stocks tend to do well.
And you can make this concept even more powerful by applying it to entire sectors.
In the seven position portfolio, I now have BOTH long and short positions – with my long positions focused on a sector that is poised to actually up today!
When the DOW dumped over 800 points two weeks ago this turned up as a safe haven.
Now I would not go long Canopy Growth or the other dope stocks right now.
But using them with pair trades makes sense.
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