Sticking with a position can be difficult as stocks climb a wall of worry. With the election, Fed meetings and an earnings season with 15%+ moves going either way, there's been reason for caution with individual stocks. That's why sometimes we'll lean heavier on a market ETF like the SPDR S&P 500 or related ETFs.
Specifically, we'll get leveraged counterparts like the 2X ProShares Ultra S&P 500. That gives us profit potential closer to that of an individual stock without the news risk that can slam a company's shares.
Strong September for S&P 500
Our most recent closed trade for the S&P 500 started with a big outside day and recovery after a Consumer Price Index (CPI) report shook markets (1). We started increasing exposure with some individual stocks and then went with the 2X leveraged SSO trade the next day (2).
Even though we started with a full position, we quickly added to make a double position. First we added after we made some progress (3). Then we added on a strong move after the Fed cut rates by 50 basis points (4).
After Strong postelection Rally, Is There Reason To Approach With Caution?
When the S&P 500 broke its 10-day moving average line for the first time since our entry (5), we peeled back our last purchase. Taking a portion off but keeping the bulk of the position kept our average cost low and our cushion.
After the S&P 500 recovered with support at its 21-day moving average line, we added that position right back (6).
An Exit That Didn't Last Long
As stocks came in sharply just ahead of the election, we scaled way back on our exposure. The S&P 500 sliced through its 21-day line (7) and we exited the bulk of the position that day with the remainder leaving the next.
We were facing a number of events: the election, Fed meeting and a continuous onslaught of earnings. Our plan was to wait for the dust to settle following those events. With the S&P 500 trading below the 21-day line it seemed the safer course of action.
But when the Nasdaq composite and S&P 500 both retook their 21-day lines (8), we increased our exposure quickly. Again, we used SSO as our S&P 500 exposure with adds to the Russell 2000 and Nasdaq 100 through leveraged ETFs as well. We left ourselves with plenty of cash to cushion a blow if there was a negative reaction to news events. At the same time, we had enough exposure to allow us some participation and a foothold should the market react positively.
That foothold served us well. As the election got a quick resolution and the market reacted positively (9), we were able to ramp up exposure to a point where we beat the S&P 500 performance on Wednesday and Thursday.
Though it was not our plan to ramp up before the election was decided, sometimes the market makes decisions for you. The positive action on election day put us in motion and the follow-through action on the S&P 500 kept us in motion.
It's a place where technical analysis can hold a big benefit over going with your gut.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
