The fourth quarter is fast approaching and as we look to close out 2016, investors are strategizing how to position themselves. Hedge fund managers, traders and regular investors must know potential scenarios that could create big opportunities.
This past week's global central bank action has brought confidence to the markets. All-time highs are within reach and bulls are licking their chops at the potential of a market surge into the close of 2016.
However, there are still risks remaining that could thwart the bull market. Bears will be ready to pounce at the first sign of risk, so investors must be prepared for the opportunities a sell off would create.
Market Risks for Q4
1) The U.S. Presidential election -- Now that the September rate decision is behind us, the next big market mover will be the election. A month ago, it looked like the race was over, with Hillary Clinton leading in all the polls. However, recent polling data suggests the race is becoming closer and the uncertainty of a winner can make markets nervous.
2) December rate hike -- Currently there is a 50/50 chance of a rate hike in December. Once the election is over, traders will focus on the Fed again and the impact a hike will have on the markets. The Fed has not raised rates since last December, which led to an aggressive sell off early in 2016. Investors must be cautious how the market reacts to a hike headed into the new year.
3) Oil prices -- Crude is trading around $46, in the middle of its recent range between $40 and $50. The black stuff is most likely to stay within this range, but a break of the $40 level due to oversupply could harm the energy sector. A significant pullback in energy prices would drag equity markets lower as it did earlier in the year.
4) Earnings and economy -- Data continues to show the economy sluggishly moving along. While some indicators signal a slowing economy, others such as non-farm payrolls show strength. This balance is good enough to keep bullish investors involved in stocks. However, if earnings season shows corporate profits are not as good as expected, stocks could see selling pressure.
If any of these risks come to light, the market would see a sell off that could provide a great buying opportunity going into 2017. Investors must be ready with a game plan and position themselves for different scenarios that might come their way.
Listed below are three scenarios that could play out and how an investor can profit.
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Scenario #1: The Bull Goes Berserk
The possibility of a September rate hike spooked markets earlier in the month. This caused a dip that created an exciting opportunity to buy stocks before the Fed announcement. Now that the Fed is out of the way, investors might choose to buy stocks into the election, edging the S&P closer to 2200. Once the election is over, a Santa Claus rally could be on the table if the Fed doesn't get too hawkish going into December. This could setup a January effect rally that would start off 2017 flying up to 2240 and perhaps 2300.
If this scenario plays out, investors should be on the lookout for high-quality stocks that dip lower on market down days. If the bull pushes higher into the end of the year and beyond, this strategy will lead to big pay days.
Scenario #2: The Bear Pounces on Risk
If the four risks outlined above come into play, there is a good chance that markets could see a short term panic. Investors should expect that if 2100 were to be tested it would break, putting the 200-day moving average at 2060 in play. However, this dip could be a buying opportunity as we saw earlier this year, when markets bottomed in early March. The bear might pounce in Q4, but I would expect a bounce back into the end of the year.
Spectacular buying opportunities are found when markets are in panic. If Trump gets elected causing markets to sell because of his "wild card" persona, investors must be ready to buy the dip. It would be wise to make a watch list of high-quality stocks and be ready if that 2060 level comes into play.
Scenario #3: Range Bound Trading Continues
For nearly two months this summer, the S&P 500 traded in a tight range on very low volume. The index was stuck between 2150 and 2190 and failed to push higher. After a brief dip down to nearly 2100, the index has rallied back above 2150. So what happens if we get stuck in this range again?
The key is recognizing the range and then trading it with discipline. It sounds simple, but due to market noise a trading range isn't easy to spot and therefore trade. However, buying stocks at 2150 and selling at 2190 multiple times would have led to juicy profits over the summer. This scenario is actually very likely until we push past the biggest risk of 2016, the election.
How to Capitalize
You may not know how to trade these scenarios...but I do. It comes from spending 12 years as a professional trader and watching how markets move and react to news. And the next three months might lead to some of the biggest market moves in early 2017.
Furthermore, these moves can be exaggerated by High-Frequency Traders (HFTs) who fire off a massive volume of short trades, scaring investors into selling stocks that are actually strong. Then they pocket quick profits as the stocks tumble. And next they buy those same stocks as they bottom out and ride the rebounds. This is a profit party you can join regardless of which scenario plays out.
That's where Zacks' Counterstrike portfolio service comes in. It's designed to take advantage of suspicious trading activity created by HFTs. We will buy beaten down quality stocks and short stocks that are not fundamentally sound. When these stocks have moved our way, we will lock in gains and look for the next opportunity.
At the moment, we're holding 8 stocks and I plan to add a high-potential ticker on Monday. Double-digit gains could be seen in 1-4 weeks.
Be sure to look into Counterstrike today. But don't delay. To maximize the profitability of our recommendations, we have to restrict the number of investors we share them with. Access will be closed to new investors at midnight on Sunday, September 25.
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Wishing you great financial success,
Jeremy Mullin has been a professional trader for the past 12 years with specific experience profiting from patterns set by High-Frequency Traders. He is the editor of the Counterstrike portfolio recommendation service.