Use This Trade to Stomp a Boring Market
The weeks following the election lit a fire under the stock market.
In an epic rally, the Dow Industrials shot higher by 2,000 points in a matter of weeks. Forgotten sectors offered traders fresh gains every single day. The struggles from earlier in the year vanished.
How quickly things change.
Right now, the market action is downright boring. The major averages have barely budged in 2017. Just as the market spit out a record gain to finish the year, a new record for standing still is now in the books…
“A funny thing happened after the third-largest rally since 1900 for the Dow from the U.S. election until year-end (+7.8%)—it is now in the midst of the smallest monthly range ever,” explains the LPL Financial Research team. “That’s right, with the Dow flirting with the big 20,000 level, it has simply stopped moving, up or down, and the daily ranges have been historically small.”
There are just too many distractions for investors these days. As a result, stocks are holding their breath as we barrel toward the inauguration.
But that doesn’t mean there aren’t any trades lurking under the surface of the major averages…
While almost every investor on the planet is laser focused politics and Twitter rants, our eye is drawn to the tech sector.
The big tech darlings that everyone left for dead in late 2016 have come roaring back to retake their rightful throne as market leaders. This is one of the best places to look for a new trade—even if the market is stuck in a tight range for now.
It’s important to note that big tech hasn’t completely dominated the post-election melt up. At the beginning of December, traders kicked the market’s most flashy, popular tech stocks to the curb. The FANGs—Facebook, Amazon, Netflix, Google— received the biggest beating as folks piled into materials and banks. By Dec. 1, each of these once-coveted stocks had dropped at least 4.5% since election day.
The new year has been much kinder to these mega-caps. Facebook shares are up more than 11% so far this year. Netflix is up 7%. Google has gained 4%. Tech stocks are officially back in favor as the averages tread water.
But if we truly want to book outsized gains, we have to hitch a ride with the most powerful stocks in the sector.
That’s where semiconductors come into play.
Semiconductors have slapped around the rest of the market since they fought off their lows and broke out to new 2016 highs all the way back in June. Now they’re ready to continue their dominance as the tech sector comes back into focus.
The S&P 500 has gained 18% over the past 12 months. Over that same timeframe, the tech sector has posted gains nearing 25%. But semiconductors blow them both out of the water. The VanEck Vectors Semiconductor ETF (NYSE:SMH) boasts 12-month gains of more than 48%.
Semiconductors were the ultimate snapback trade for a market melt-up—especially when you consider the sector’s lagging performance leading up to its big breakout back in June 2016. You probably recall that investors wanted absolutely nothing to do with these stocks when the market was struggling in 2015.
But now that the semis have regained a leadership role, we can expect to see the trend continue higher. That not just bullish for the tech sector, but the entire market.