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Buy Fear - Easily Pick Up Profits on Stock Market Dips

Companies / Investing 2014 Nov 25, 2014 - 05:29 PM GMT

By: Money_Morning

Companies

Michael A. Robinson writes: U.S. stocks are hitting record highs on an almost-daily basis as we close in on the end of the year.

But the whipsawing we've had to endure to reach this point is enough to give you saddle sores.

The Standard & Poor's 500 Index has gained a healthy 11.6% in 2014 through the closing bell on Friday. From Sept. 18 to Oct. 15, however, the bellwether index fell 7.4%. The downturn ended quickly, and stocks reversed course. In the month that followed, through Nov. 14, the S&P 500 surged 9.5%.


On three other occasions this year, the S&P endured sell-offs of 4% or more.

It's been downright dizzying. But for us, a ruckus of a market like this can be a fantastic opportunity.

Today, I want to show you my secret "risk-busting" strategy that's perfect for rough rides such as this. It's just the tool you can use to turn a volatile market to your advantage.

Keep reading, and I'll show you how to harness this strategy out on the range…

Buy Some Fear

This is what's happening out there in the markets. As the markets keep reaching new record highs, investors get nervous and panic sell.

That can leave long-term investors who believe in their stocks shaking their heads in bewilderment.

But one of my favorite trading tools lets us buy other investors' fear in an easy-to-use, systematic way. It's like "Mr. Market" is dropping $100 bills on the sidewalk – with this strategy, we can pick them up.

I call it the Cowboy Split. Simply put, it means making staggered entries.

Here's how it works. You buy less than your usual amount of shares – say, half – of a tech stock you like at market. Then, you put in a "lowball limit order" to buy the rest at a discount – say, 20% or even 25%.

With a lowball limit order – more commonly known as a "buy limit order" – you tell your broker to buy more of the stock at or below that specified price.

If a $100 stock you believe in keeps rising – good news! – your order is never filled. However, if it falls to $80, you pick up more shares at a discount – and make even greater gains when the stock starts moving again.

For individual investors, this is a great way to invest for the long haul while turning the market's volatility to your advantage.

That's why you all should use this strategy on a regular basis.

Now then, let's take the Cowboy Split for a spin.

A Test Drive… in China

Bitauto Holdings Ltd. (NYSE: BITA), one of our favorite stocks, is a leader in China's automotive e-commerce sector. It sells online advertising and provides reviews and pricing info for consumers. It also serves as an online showroom for both new and used car dealers.

In late October, I still saw the potential for strong gains for the stock because Bitauto is uniquely positioned to profit from big changes reshaping China's automotive market.

The stock had come under enormous selling pressure a few weeks back as concerns mounted about China's slowing growth. The World Bank forecast that the Chinese economy will grow at 6.9% a year, down from earlier forecasts of 7.1%.

As a group, Chinese e-commerce stocks got hammered from late August until the middle of October. Bitauto got slammed on fears that car sales are slowing in the world's most populous nation.

From its all-time high of $96.14 on Aug. 26 to its recent low on Oct. 13, the stock declined 34%.

This huge haircut gives us a great way to test the Cowboy Split in a real-world setting.

Assume you bought the stock at $96.14. Had you simply put in a 25% stop loss, you would have exited the position at $72.10 on Oct. 6, at a loss of $24.04 a share.

At the time, it might have seemed wise because the stock didn't hit bottom until a week later on Oct. 13, when it closed at $63.09.

Now let's see what would have happened if you had applied the Cowboy Split.

To keep the math simple, assume you had put in a lowball limit order to buy a second one-half position at $72.10. You'd have made 28.7% on that tranche in the five weeks ended Nov. 14.

That second tranche would have brought your cumulative gains to more than 12% in just a little over three months for annualized gains of 44%.

A Peek Behind the Curtain

The Cowboy Split has been particularly profitable for readers of my premium trading service, Radical Technology Profits.

Take the case of Pernix Therapeutics Holdings Inc. (Nasdaq: PTX).

On Nov. 11, shares of this specialty biotech firm broke out in heavy trading. Riding massive volume, Pernix shot up more than 16%, for a time ranking as the day's ninth-biggest gainer among all major domestic stock exchanges.

Some of the frenzy died down by the end of the session. But Pernix still managed to end the day as the 14th-biggest gainer, with profits of more than 14.5% in a single session.

And that move came just one day after the stock advanced by more than 9%. Overall, Pernix is now up more than 40% since we first picked it up in late June.

But my service's Cowboy Split tranche, which we bought in early August, is up more than 68%, for annualized gains of 272%.

Thus, the Cowboy Split is a great way to profit from volatility in two ways.

First, it keeps you from parking your cash on the sidelines when choppy markets can seem very confusing. Second, it's like buying portfolio insurance that can pay off handsomely in a matter of just a few weeks.

And so, you all can use the Cowboy Split to move you closer to that Old West dream of a life of financial freedom – in this case, built on the wealth created by the New West of Silicon Valley.

Source : http://moneymorning.com/2014/11/25/easily-pick-up-profits-on-stock-market-dips/

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