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Driving while Looking in the Rearview Mirror

08/03/2017 2:59 am EST


Landon Whaley

Editor, Gravitational Edge

Today’s long trade idea:You can get long US large cap growth companies via the iShares S&P 500 Growth Index ETF, IVW. As long as IVW trades above $134.24, then use declines below $139.89 for new long trades, suggests Landon Whaley of Focus Market Trader.

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If you want to be a consistently successful investor, then you must channel your inner Eckhart Tolle and focus on now. Stay with me; I’m not going to launch into a diatribe about mindfulness. But what I can tell you is that if you focus on better understanding what is happening right now, you will see both opportunities and risks that most market participants miss. Focusing on now helps you better handicap the probabilities of various scenarios in the future.

This “now” approach is in stark contrast to most investors, who either look in the rearview mirror at three-month-old data, or focus on forecasts in an effort to predict what will happen months in the future.

Successful investing is not about forecasting the weather for tomorrow, but instead about noticing if it’s sunny or raining today.

Last week, investors were caught driving while looking in the rearview mirror when the initial estimate of U.S. Q2 GDP was released. Folks, we are a third of the way through Q3. Who gives a rip what happened in Q2?

Not only is this data point as dated as my last relationship, but it’s also going to be revised 700 times over the next six weeks. Q2 is in the history books, so you need to turn your attention to Q3 if you want to position yourself appropriately.

Over the next couple of weeks, we receive our first glimpse of Q3 (July) data. Allow me to give you a sneak peek into what you can expect, using my proprietary U.S. growth indices.

It’s all about the growth

My U.S. High Growth index is comprised of assets that perform well when U.S. growth is accelerating, and the Slow Growth index is comprised of assets that perform well when U.S. growth is slowing.

U.S. growth has been accelerating since it bottomed in Q2 2016. Over the last twelve months, my High Growth index has outperformed my Slow Growth index by 26.6%! More importantly, during July, the High Growth index continued to outperform the Slow Growth index by an additional 120 basis points.

But growth isn’t just improving here in the U.S., global growth is tracking at its fastest pace in over three years. Not only that but the growth has been broad-based with both developed and emerging market growth accelerating together for the first time since 2010.

The bottom line is that by paying attention to what’s happening now, and seeing green shoots everywhere, I know the probabilities are slanted towards U.S. growth continuing to accelerate here in Q3. This in turn tells me exactly which risks and opportunities are most likely to present themselves.

One such opportunity is in US large cap growth stocks.

Harness size and style

When U.S. growth is accelerating then go-go growth sectors like technology and biotech generally outperform other sectors of US equities by a wide margin. Right now, large cap stocks are outperforming small and midcap stocks by 5.7% year-to-date.

Not only that but if you stack rank all the companies in the S&P 500 by sales growth, the top 25% of companies are outperforming the bottom 25% by 9.9% year-to-date.
In a similar fashion the top 25% of companies, in terms of earnings growth, are outperforming the bottom 25% by 10.6% so far in 2017.

Investors are clearly favoring larger market cap companies that have both sales and earnings growth momentum. We can harness these size and style factors preferences to enhance our returns, which is why large cap growth stocks will continue to be an opportunity here in Q3.

The long trade idea

You can get long US large cap growth companies via the iShares S&P 500 Growth Index ETF (IVW).

As long as IVW trades above $134.24, then you can use declines below $139.89 to initiate new long trades.

Depending on where you enter the trade and how much room to move you want to give this trade, you can use a risk price between $137.18 and $134.24. That said, your risk price line in the sand is $134.24, if IVW closes below that price, then you should exit any open trades.

If the trade moves in your favor, I would book profits on any rally to the $142.07 to $143.77 range.

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