What Sentiment Means For The Market (And How To Trade It)
As stock market volatility increased over the past few weeks, I noticed something interesting at MarketWatch.com.
The list of their most popular stories on Wednesday is shown below.
Two of the five most popular stories are about family dramas.
I’ll admit it; I click on those stories sometimes. They present lifestyles I’m not really familiar with. My father, fortunately, didn’t live a life of crime and drugs.
Just like the shows on Bravo or E! network, these stories are a guilty pleasure. But every day, guilty pleasures like this pop up on the most popular list. They’re more popular than stories about antitrust concerns for tech stocks, earnings from computer hardware companies, elections, government deficits, and the Federal Reserve.
This is a recent change. In the past, the most popular stories were centered on the most popular stocks or economic news. I believe this change reflects a shift in investment sentiment.
What The Data Says About Sentiment
Investors say they’re nervous. This can be seen in the latest data in the American Association of Individual Investors (AAII) weekly survey.
In an average week, 38% of investors are bullish, 30.5% are bearish, and 31.5% are neutral. Last week, there were more bears than usual and fewer bulls.
Source: AAII.com
So investors are saying they’re bearish. But at the same time, they’re reading about girlfriends splurging on luxury cars and children demanding a share of their father’s small monthly disability payments.
I know this is anecdotal, but I think it’s worth noting. It’s always more important to watch what investors do rather than listen to what they say. And right now, I think investors are complacent, expecting the bull market to continue. In other words, they’re not really worried. This is consistent with how investors behave at market tops — and that’s a sign that we need to be cautious.
The Cautious Plan For Income
We don’t know what the future holds. But it is important to expect the unexpected.
Generations of individual investors believed that stocks and bonds were the only source of income in the market. That meant having to tie up your capital for months (or years) before earning any sort of meaningful income on your investment.
But thanks to low interest rates and pitiful yields on equities, investors have been desperately seeking out alternatives.
The good news is that there is another way to generate income from the stock market without owning bonds or stocks. And it’s been used by market pros for decades.
You simply collect a payment up front. You get to keep the money no matter what. Then, the next week, you get to repeat the process with a different company. You can do this over and over again throughout the year, building a nice monthly income stream.
You’re probably asking, “What’s the catch?”
There’s no catch per se, but you do have to be willing to use options. I know the word “options” makes some people uneasy, and I understand why. When I started trading, people warned me that options were risky.
But the truth is, there are a lot of misunderstandings about options. Believe it or not, options can actually help lower your risk. In fact, when used correctly, the odds of success are extremely high.
Since I began teaching this strategy to investors in my Income Trader service, we’ve closed hundreds of income trades and 90.9% of them have been winners.
The particular strategy I use is selling put options. Here’s how it works…
How I’ve Sold Put Options With 90.9% Success
Selling puts is not complicated. There are essentially two phases – the income phase and the waiting phase.
Phase 1: You collect income known as “premium” up front from the options buyer. This can range from as little as $30 to hundreds of dollars per trade depending on how many contracts you sell.
In return for this income, you agree to buy 100 shares of the stock per option contract you sell if the stock drops below a certain price (what’s known as the “strike price”) by a certain date (the “expiration date”).
Phase 2: You wait for the option to expire, which is typically between 30 and 90 days away.
Now, if the stock does fall below the strike price, you will be obligated to buy the shares at that price. This is why I only sell puts on quality stocks I would be happy to own at a discount anyway.
But if the stock is above the strike price, you simply keep the cash and move on to the next income opportunity. And with the vast majority of my trades, that is what has happened.
If you had a $150,000 portfolio and followed my advice in Income Trader each week in 2016, and sold one put contract per trade, you would have averaged nearly $5,408 every month. That’s $1,298 per week. $64,896 in a year.
2017 was just as good to us, with many readers reporting thousands or even tens of thousands of dollars in income every month. So was 2018, 2019, and I expect 2020 will be as well.
That’s because this strategy works in any market. It’s one of the closest things to a “win-win” when it comes to investing.
Want To Trade With Me?
For those of you who are interested in learning more about this strategy, I’ve put together a brief, informative special report. I’ve been told that it’s the clearest explanation of selling puts you’ll ever see.
So, if you have just a few minutes minutes to spare, I can teach you how to generate thousands in income each month without buying stocks or bonds. Just click here.