How to Profit From the “Shadow Rally”
The stock market is charging higher this summer.
But no one is talking about it…
You won’t hear about this “Shadow Rally” on your favorite financial news network. And you certainly won’t read about in the pages of your local newspaper. But it’s happening. Stocks are rallying off their June lows and providing alert traders with countless opportunities to book gains.
Today, I’m going to show you how this “Shadow Rally” is shaping up right under your nose. And I’ll give you one quick metric you can use to help pinpoint the perfect time to buy into stocks just as they could be ready to push even higher.
But first, here’s a little test you can perform just to prove that the recent run in stocks has been completely ignored by the average investor.
When you get home from work this evening, say hello to your neighbor. Or call a friend. Ask anyone —family, coworkers, or even your — how they feel about the market. How do they think stocks are faring this year?
I can all but guarantee they’ll tell you stocks are in the gutter. The economy is a mess, they’ll say. No one is making money with stocks. They’ve been warped by a news cycle that has become completely inundated with negative financial headlines. Earnings are down. Europe is collapsing. Unemployment remains high. China’s economy is slowing.
Of course, the bleeding financial headlines fail to mention how U.S. stocks are gaining strength this month…
Here’s where the S&P 500 sits today:
As you can see, there is a massive disconnect between how the market is acting and how the everyday investor feels about stocks right now. For weeks, I’ve told you how negative sentiment has risen to historic levels. Now, it appears to have also permeated the psyche of anyone who has ever owned a share of stock.
In reality, the market has moved off its June lows in a steady and orderly channel (blue lines). In fact, the S&P 500 is up more than 11% year-to-date. That’s pretty impressive. And now that you know that this rally is happening right under your nose, you simply have recognized it and take advantage…
Here’s how:
It’s true that U.S. stocks have fought higher since the spring correction. Yet one group of stocks in particular has been lagging the overall market: small-caps. During the recent rally, defensive stock plays have been in favor. These are typically blue chip companies that pay a dividend. In contrast, you can see how smaller stocks have lagged their larger counterparts by taking a quick look at the Russell 2000 small-cap index:
Notice that the Russell has made higher lows (blue dotted line) since it bottomed in June—but has failed to make higher highs (blue arrows) like its large-cap counterpart, the S&P 500.
Your buy signal will occur when the Russell 2000 breaks above 820 (solid blue line). When riskier small-caps begin to attract the attention of formerly skittish investors, you will have a great low-risk opportunity to buy into stocks as the market is beginning its next leg higher.
Best,
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Greg Guenthner
Greg Guenthner, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes. He is also the editor of Agora Financial’s Trend Playbook, a free resource for trend followers and technical traders. For close to a decade, Greg has led Agora Financial’s small-cap division, where he founded one of one of the only independent OTC research advisories in the industry. Greg specializes is classical trading techniques and combines timing strategies with his fundamental analysis of small-cap stocks.
He is a member of the Market Technicians Association and hold the Chartered Market Technician designation.
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