The look on his face let you know it wasn’t going well.

He was clearly frustrated, almost in tears running up and down the court, and it wasn’t even halftime.

I was at my 8-year-old son’s basketball playoff game, and they were down by 10 in the second quarter.

For this age group, scoring 20 points in a game is a lot. So, to be down by 10 seemed impossible to come back from.

But basketball is a game of runs — where teams can rally back into a game.

That’s exactly what his team did, and they made it a great game before it was all over.

The nature of going on runs sums up how the markets work.

Certain asset classes are going to be in favor for some time, where it seems like they can’t do anything wrong in analysts’ eyes.

Eventually, that favor will switch, and the stocks that no one liked will eventually be in favor.

We are at such a point in the market right now, and one segment of the market will outperform over the next year as it goes on its comeback rally.

Let me explain …

A Select Group of Stocks

So far this year, a select group of dividend stocks, known as the “Dogs of the Dow,” have underperformed the market.

The Dogs of the Dow are simply the 10 highest-yielding stocks in the Dow Jones Industrial Average (DJIA) at the end of each year.

So the stocks we are talking about were the highest-yielding stocks in the DJIA at the end of 2016.

And to find a year where this group of dividend stocks underperformed the DJIA this bad, you have to go back to 2009 — a much different time in the market.

The End of a Bear Market

If you think back to what was going on in the market in 2009, the underperformance makes sense.

The economy was going through a recession, and the stock market was nearing the end of a bear market.

In March 2009, the stock market bottomed.

The ensuing rally for the rest of the year was tilted toward stocks with more reward and more risks, not the generally stable dividend stocks.

The DJIA finished 2009 up 18.8%.

Meanwhile, the Dogs of the Dow were up 12.9%.

So far in 2017, the DJIA is up about 18.5%, and the Dogs of the Dow for this year are up almost 10%.

That’s a slightly worse underperformance than in 2009 … but the year isn’t over just yet.

And if the margin of underperformance holds, it likely means the Dogs of the Dow will outperform next year.

Looking Forward to 2018

In 2010, following the worst recent year of underperformance for the Dogs of the Dow, the DJIA still climbed double-digits, ending up 11%.

But, as investors took gains from other Dow stocks, the money was moved into dividend stocks. This helped propel the Dogs of the Dow to beat the DJIA by posting a 15.5% increase for the year.

Assuming investors follow a similar trend, and revert back to solid dividend-paying companies, we can expect the Dogs of the Dow to outperform in 2018 as well.

I’ll be back after the New Year with a further breakdown of the current Dogs of the Dow, which ones meet the list and what kind of expectations we have for them.

Until then, this is a strategy you want on your radar for next year.

Regards,

Chad Shoop, CMT
Editor, Automatic Profits Alert

When former bears call for a “New Golden Age” of the stock market, with targets of the DOW set at 100,000, well, it is clearly time for bulls to beware.

In fact, the Dow 100,000 prediction of this former bear is explained as follows:

“This is not some pie in the sky prediction.

It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.”

I mean, markets always continue their current trend unabated, especially since financial markets are purely linear environments . . . right!?!? So, why not set your target for 1,000,000 rather than 100,000 based upon the exact same thesis?

And, while another widely read author on Seeking Alpha, who has been bearish for the last year and a half, did not exactly turn bullish, he certainly took a major step towards the old claim that we have entered a “new paradigm:”

“This idea of a “Goldilocks” backdrop characterized by solid growth but subdued inflation has become so ubiquitous that it’s being treated not so much as a way of explaining the current state of affairs but rather as a theory about how the world is going to work for the foreseeable future.”

Don’t get me wrong, I think there’s some truth to the idea that the old models don’t work anymore . . .

And, despite his recognition that the old models no longer work, he then proceeded to explain why those old models should still be given significant weight, despite their admittedly clear lack of efficacy.

You just can’t make this stuff up. Truth is often stranger than fiction, and, it certainly applies in our financial markets as well. Old habits seem to die hard, no matter how bad those habits have been.

The stock market can make for an interesting study in market psychology. You see, when the stock market is dropping strongly, as we experienced almost two years ago in the first few months of 2016, people turn bearish, and many were calling for a market crash just as we were bottoming in February of 2016. We then get to a point where bearish sentiment reaches an extreme and there is only one direction to which we can turn. It was at this point, near the 1800 region in the SPX, that the market turned in the opposite direction from its bearish extreme, and began the ascent in which we currently find ourselves.

During the initial phase of the ascent, most market participants do not believe that the turn higher is sustainable. So, most remain quite bearish despite the strong rally in price. And, we see this quite evidently in the articles written by many market analysts during 2016.

Ultimately, the market begins to soar well beyond the point at which it is reasonable to maintain a strong bearish bias, and you begin to see some, but not all, in the analyst community turn bullish. And, the higher we go, the more analysts begin to turn bullish. And, when you see these former bearish analysts turning bullish, you can be certain that investors are experiencing the same “feelings.” Ultimately, the entire investment community of investors and analysts recognize the bullish trend, and begin to assume “we are in a new paradigm,” and state that this new trend will continue unabated into the foreseeable future. This is what we began to experience in 2017.

Isn’t that how the stock market has always worked? It is so simple, yet many complicate it with ratios, fundamentals, supposed market imbalances, geo-politics, or whatever news of the day you may chose. You see, markets are driven by emotion, not rationalities. Rationalities are used to explain what the market does in hindsight, and sometimes it cannot even do that. But, please recognize that these rationalities are trying to explain emotive actions. It is like trying to rationalize with your spouse when they are being extremely emotional. How well does that work for you?

And, just like trying to rationalize with an overly emotional spouse will never get you anywhere, attempting to rationalize the next movement of the stock market’s emotional environment will never get you anywhere, except maybe the wrong side of profitability.

Just as the market turned bullish when bearish sentiment reached an extreme, we can see the same perspective on the bullish side of the market when the investor and analyst community speak of “new paradigms” and expectations that the current trend will “undoubtedly” continue.

So, of late, when I read former bears claiming that this current trend will undoubtedly continue, or even current bears claiming that we seem to be in a new paradigm where the old models no longer work, it tells me it is time to be cautious.

But, one must wonder why supposedly intelligent people can recognize that their models no longer work, yet continue to rely on those models, and strongly urge you to do the same? That is the subject of an entirely different article I need to write regarding the insanity of the investor community. Stay tuned, it will be out shortly.

With the IWM striking the minimum target we set several weeks ago for this rally, the question is if it can now stretch to the upper end of our target expectations in the 156 region. And, as long as the IWM holds over the 150 region on all pullbacks this coming week, I am targeting the 155-56 region within the next week or two.

However, should we see a break down below 150 in the coming week, we would then have our first “topping” indication. While the IWM may still make a higher high if it is able to hold the 149.50 region (in the event of a break of 150), that may very well be the final high before we revisit the 133 region again.

See charts illustrating the wave counts on the IWM and S&P 500.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

As an investor, what do you prefer: certainty or uncertainty?

Certainty, of course. We all do.

When things seem certain, the future looks bright and we embrace risk-taking. When things seem uncertain, it’s hard to imagine things ever getting better, and we shun risk at all costs.

But is there really such a thing as a certain environment when it comes to investing? No. There is always risk in markets, even if you can’t see it, and by extension, there’s always uncertainty.

It is only our perception of risk that changes.

If the recent past is a calm market filled with good news, we perceive things to be quite certain. If the recent past is a volatile market filled with bad news, uncertainty is deemed to be high.

How are investors feeling today?

Quite certain.

Volatility over the last year has been lower than any period in history.

At the same time, performance has been well above average, leading to one of the highest risk-adjusted return environments we’ve ever seen.

Naturally, investors are feeling pretty good about all of this, with one measure of sentiment (Investors Intelligence) recently hitting its most extreme level since 1987.

A summary of the prevailing thinking today is as follows:

• Recent economic data has been strong -> it will continue to be strong, there’s no risk of recession.
• Earnings have been strong, are at new highs -> there’s no risk of a slowdown in earnings growth.
• Tax cuts are coming -> that will have a dramatic positive impact on growth and earnings.
• Global Central Bank policy remains extraordinarily easy -> that can only be good for markets.

Let’s address each of this from the standpoint of certainty about the future.

Economy

The economic data has been pretty good this year:

• Unemployment Rate at its lowest level since 2000.
• Jobless Claims at their lowest level since 1973.
• 85 consecutive months of payroll growth, longest streak in history.
• Manufacturing sentiment highest since 2004.
• Consumer Confidence highest since 2000.

…..read page 2 HERE

The one thing I was certain would happen over the past 12 months turned out to be the exact opposite.

Last November, the newly elected president was committed to stirring up the typical D.C. drama.

President-elect Donald Trump had a mission to “drain the swamp.”

He promised to be a president who went against the grain of how things were done.

I, along with many others, expected the one thing the markets would experience in his presidency would be wild market swings, also measured as volatility in the stock market.

After one year, we saw the exact opposite.

Volatility, as measured by the CBOE S&P 500 Volatility Index (VIX), is at all-time lows.

The stock market has experienced one of the longest runs in history without a 5% correction.

In short, there is a remarkably low amount of volatility in the markets.

And I hope you are taking advantage of that by riding the market rally with options. Let me explain …

Use Volatility to Your Advantage

Options aren’t something most people associate volatility with, but it is the first thing that comes to mind for me.

See, options are a leveraged bet on a stock moving in a certain direction. And many people use options to do just that — place bets.

But you can also strategize with options to use volatility to your advantage.

Let’s start by looking at a chart of the VIX.

If you are looking at this chart and wondering how it relates to the options market, think of it this way: When the VIX spikes higher, you are paying more for the options than you did the day, week or month before.

Volatility is factored into the options price because the price of an option is made up of three factors: intrinsic value, time value and implied volatility.

You don’t have to know what each means for now. I just wanted to note that volatility is an input that can determine the price of the option.

And since it helps determine a price of an option, it means we can take advantage of it.

Volatility Needs to Be on Your Radar

What you want to see in the options market is low volatility when you are buying options, and high volatility when you are selling options.

Buying options when volatility is low allows volatility to rise and work in your favor. If volatility increases after you buy the option, and the stock hasn’t moved much, you could be sitting on a nice gain even though the underlying stock was basically flat.

On the other hand, if you are buying options when volatility is high, and then volatility declines, you could lose money even if the stock went the direction you expected.

Again, these gains and losses in the options market can come simply from volatility movement, and not from price movement of the stock.

That’s why volatility needs to be on your radar if you are trading options.

With the current low-volatility market, buying options is something we all should be taking advantage of.

Regards,

Chad Shoop, CMT
Editor, Automatic Profits Alert

Whether the stock market is entering a multi-month parabolic phase or beginning a new multi-year secular bull market the trading strategy is the same. This video details that strategy. 

….also: Really, Are We That Stupid?