“How can you make money when the market is flat?”
That’s the question my brother asked as we sat down for a cup of coffee.
Darrell put some money into an index fund a year ago. And when he looked at the value of his account last month he was disappointed to see his investment had barely budged.
“I understand the market trades back and forth sometimes. But is this REALLY the best way for me to grow my kid’s college fund?”
It’s a question I hear a lot — both from readers and from friends and family members who know that I’m an investor.
And today, I want to fill you in on some of the best ways to make money… regardless of whether the stock market is trading higher, lower, or sideways!
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It’s All About the Currents
Have you ever been to a coastal area with a rip tide?
If you have, you know that when it comes to strong currents, you can’t see much on the surface. In fact, if you’re not familiar with a certain beach, you could put yourself in danger just by taking a quick swim just off the shore!
Rip tides are extremely powerful forces of nature. Yet because they occur below the surface, most people are entirely unaware of what’s going on!
The same can be true for currents — or trends — that happen below the surface in the market.
For instance, there are seasons when certain areas of the market roar higher, while other areas experience a significant pullback.
If you’re looking at a big market like the S&P 500 or the Dow Jones Industrial Average, you might not notice much of a change. But if you look below the surface and see how stocks in different areas of the economy are trending, you’ll see there’s a lot more action going on.
Take this week for instance.
Over the weekend, a drone attack crippled Saudi Arabia’s oil infrastructure, taking about half of the country’s production offline.
The news sparked a huge move for crude oil and drove energy stock prices sharply higher! Aerospace and defense stocks also jumped on the news because investors think there’s a bigger chance this attack will draw the U.S. into a military conflict.
But at the same time, some other key areas of the market traded lower. A few key dividend stocks traded lower because higher interest rates tempted some investors to pull out of these stocks and put money back into bonds.
So between the positive action in energy stocks and the negative action in high-yield plays, the overall market didn’t move much. Of course that doesn’t mean this has been a dull week — not by a long shot!
And while it may have been sensational to see news stories covering burning oil fields in Saudi Arabia, the market action wasn’t that far outside what I consider to be “normal.”
You see, there’s always a bull market somewhere. And there are always opportunities for investors to make money — or lose it.
The key is to understand which way the underwater currents are flowing, and to invest in the areas of strength that can grow your wealth.
Speaking of… I’ve got one of those areas for you today!
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A Shift Into Value Stocks Has Only Just Begun
Over the past few trading sessions, there has been a monumental shift in which stocks are popular, and which stocks investors want to avoid.
For years, momentum stocks have traded steadily higher, giving investors great returns and rising to levels that I would never have expected.
The trend has been helped along by investors like my brother who exclusively buy index funds. You see, as these momentum stocks trade higher, their stock market value becomes bigger in comparison to the overall economy. And that means index mutual funds must buy more of these momentum stocks.
As more investors like my brother plow money into these funds, the funds keep buying popular momentum stocks. And the cycle continues.
This has led to some big distortions in the market, where popular stocks are trading well above any justifiable price. Meanwhile, there are an increasing number of “value stocks” that have been left behind. These stocks are not a big part of index mutual funds, and so less money is being invested in these companies
Think of this like a seesaw — with growth and momentum stocks riding one side of the plank to an extremely high level, while value stocks are sitting on the low end of the seesaw near the ground.
At some point the seesaw naturally shifts direction, and that’s exactly what we’re seeing in the market right now. Value stocks are becoming more popular, while momentum stocks are starting to lose their luster and trade lower.
In fact, this past week, investors drove the biggest move out of momentum stocks and into value stocks seen in years!
This is just like a shift in the tide, triggering a new underwater current.
And given how much money has flowed out of value stocks and into momentum stocks for the past several years, this reversal could be very powerful.
In fact, I’m expecting this shift to be one of the major themes that we cover here at The Daily Edge for months to come!
You might not see too much happening on the surface when it comes to the Dow or the S&P 500 levels. But if you tap into this trend of capital flowing out of momentum stocks and into value plays, you’re likely to grow the value of your nest egg exponentially.
Today, I’d start by picking up shares of “boring” stocks like Goodyear Tire & Rubber (GT). This stock has fallen out of favor with investors because it doesn’t have an exciting business. But the company still generates reliable earnings and pays a 4.7% dividend.
Just this month, shares of GT traded higher by nearly 35%. And if the new current drives this stock back toward last year’s highs, GT could still have another 167% to go!
So consider adding GT and other value stocks to your investment account.