Today there was a great deal of trader chat on the floors in New York and Chicago about institutions buying call options on the volatility index (The VIX).  Essentially, this is a short-term bet that that the VIX will rise which means they are concerned about stocks becoming more volatility (which is another way to say they are concerned about stocks going down).

As we can see in the two charts above, the VIX is at a relatively low level compared to where it has been over the past year and over the past seven years.  In fact, 2013 and the start into 2014 has been eerily quiet in terms of volatility in equities.  Maybe this is enough to spook those institutions to look for some cover.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

With your local friendly asset-gatherer constantly promoting the cheapness of stocks of the TINA (there is no alternative) to BTFATH, TV talking-heads jabbering over ‘stock-pickers’ markets (infuriating Cliff Asness), and CEOs trotted out day after day to espouse how bright the future looks (even if outlooks in the immediate future are down-down-down-graded); it is hardly surprising that sentiment among the sheeple is so extremely bullish. So, when we saw the chart below… we could only ask – what do the insiders know that the average-joe-investor doesn’t?

Of course, we are sure someone will try and explain away this avalanche of insider-selling with “tax-related” factors or “taking-profits” but none of that negates the less-than-optimistic tone that it implies about what the short- or medium-term expectations are from management of the firms that comprise the US equity market…

Today’s note is going to be “uncomfortable”… 

But it could lead to one of your biggest trading profits this year. 

Let me explain…

Last month, we showed you the big boom in biotech… 

Remember, biotech is one of the greatest “boom and bust” sectors known to man. 

Since 1983, the sector has seen four triple-digit runs… and one quadruple-digit run of 1,347% in the early 1990s. The busts were equally spectacular, taking the entire sector down by as much as 70%. 

After the most recent bust in 2009, the Nasdaq Biotech Index started a huge rally… The index is up 250% in five years. And it was the top-performing sector in 2013.

Despite the big run higher, we argued that there would be more gains ahead…
 

If you gathered 1,000 average investors together, fewer than 10 could confidently say that biotech is one of the top-performing sectors of 2013. In other words, despite the enormous bull market, folks aren’t “hot” on biotech… yet. 

Money is flowing into these stocks… Valuations are increasing… The story is starting to appear here and there. But it’s not on the front page of the papers. It’s not a feature story on CNBC. And you won’t hear about it at cocktail parties. 

It’s what we call a “stealth” bull market. And it still has room to run higher.

Since then, the double-long biotech fund (BIB) has gained more than 19%. That’s a big move for just three weeks. 

Now here’s the “uncomfortable” part… 

If you have big gains in biotech, sit tight. 

Many traders, when they see profits in their accounts, get “itchy trigger fingers.” They want to pocket a gain before it has the chance to vanish. 

Over the long term, that’s the wrong strategy. If you collect your profits early, you may cheat yourself out of a big move higher. And with biotech, that could be a very big move higher… 

Right now, the companies in Datastream’s Biotech Index are trading at over 40 times earnings. That’s up from 20 times earnings three years ago. But at the peak in 1999-2000, the index traded up to nearly 140 times earnings. 

One classic piece of trading wisdom comes from legendary trader Jesse Livermore. As detailed in the book Reminiscences of a Stock Operator, Livermore said: “It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!” 

In other words, his biggest gains came from “sitting tight” through big bull-market moves. 

So that’s our recommended action to take with biotech today. If you have a large, short-term gain, you might be tempted to take it off the table. But the trend here is still moving higher. So it’s better just to let a trailing stop tell you when it’s time to get out. (We recommend a 15% trailing stop in DailyWealth Trader.) That will give your profits room to grow. 

It might be uncomfortable to sit tight on this trade. But it’s the right thing to do. 

Good trading, 

Amber Lee Mason 

P.S. This idea – that you should let your winners run – is half of the most important lesson you can learn about trading. We made a short educational video to walk you through the whole lesson… and explain why it’s so important. You can watch it right here. (It’s just three minutes long.)

Further Reading: 

“We love to sell our winners too soon,” Dr. David ‘Doc’ Eifrig writes. “It’s a nearly universal impulse… but a terrible investing choice.” So how do you know when your winners have had enough time to run? Doc says the strategy for knowing when to sell is “determined by why you bought in the first place.” Get all the details on Doc’s strategy here. 

On the other hand, Steve Sjuggerud says most people don’t know when to sell a falling stock. “So they’re frozen into inactivity… until you hear the all-too-familiar phrase, ‘Well, it’s too late to sell now.'” But by creating an exit strategy, Steve says “you’ll never lose another night’s sleep worrying about which way your investments will go tomorrow… Because unlike most investors, you’ll have a plan.” Learn how to create your own exit strategy here.

Whenever the level of the Shanghai Composite Index approaches the current calendar date (2014), I take notice.

Over the last few trading session, it has fallen through this level and closed at 1,991 yesterday.  As illustrated on the accompanying charts, it last traded below 2,000 during June and July of last summer. 

During the depths of the global credit crisis, it fell to 1,706 in late 2008 from a peak of 6,092 in October of 2007.

Another mesmerizing statistic is that yesterday’s close of 1,991 is equal to where the index traded in the summer of 2000, 13 ½ years ago.

So, for investors investing in one of the world’s hottest economic growth spots, an index representing stocks in that economy has gone nowhere since near the turn of the millennium!

The lesson here is that hot economies don’t necessarily mean there will be much return on investment for adventurous investors.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.