Masters Series: How to Trade Sentiment for Quick, Double-Digit Gains
Editor's note: Your next cocktail party can be a great way to find contrarian investment ideas. But it isn't the only way.
In today's Masters Series essay, Steve Sjuggerud explains another way to gauge investor sentiment – and explains how he used it to safely generate 16% gains in less than five months for his True Wealth readers...
How to Trade Sentiment for Quick, Double-Digit Gains
When the facts change, we need to change, too...
I love using sentiment to find unloved ideas. And those opportunities often lead to quick, double-digit gains. But when sentiment goes the other way – and the idea becomes loved again – it's time to move on.
That's exactly what happened in a recent trade in my True Wealth newsletter.
We ended up with a 16% gain in just five months.
Let me show you how...
This recent trade came in the commodity market. Specifically, it came in a few commodities most folks never think about... grains.
This includes corn, wheat, and soybeans. Like I said, most investors don't put much thought into investing in these commodities. But back in January, the opportunity was too good to pass up.
Grain prices had crashed and been left for dead for years. But then a slight uptrend appeared. That, paired with extreme negative sentiment, told me that quick gains were possible.
We made the trade with the iPath Bloomberg Grains Total Return Fund (JJG). Our initial plan was to sell in 12 months or when we were up 30%, whichever came first.
But we ended up selling early and locked in a 16% profit in five months.
So why did our plan change? In short, grains went from extremely hated to extremely loved.
The Commitment of Traders (COT) report is a great way to spot market extremes. Essentially, it shows the "real money" bets of futures traders. During our trade, the COT had made a major shift from bearish to bullish.
Investors hadn't bet on higher prices to that degree since 2012... right before a major fall in grain prices.
Similarly, my friend Jason Goepfert of the excellent SentimenTrader saw the same thing. His proprietary "Optix" reading showed that both corn and soybeans were at super-bullish levels not seen in years.
When grains had become so loved, so quickly, we knew it was time to sell. And as you can see from the following chart, our timing worked out perfectly...
We were happy to pocket a 16% gain in just five months. That's a gain of more than 38% on an annualized basis.
But the more important thing was that we sold before extremely positive sentiment caused grain prices to crash. JJG fell 25% in less than three months after we sold.
Sure, our timing was fortunate. And we won't always know the exact time to get out of a trade before a crash. But the truth is, extremes in sentiment made our buy and sell decisions easy for us.
We bought when grains were hated and we sold for a 16% gain when they were loved... just before a big crash.
Our grains trade was a perfect example of why we use investor sentiment to help guide our investment decisions... and why you should, too.
Good investing,
Steve Sjuggerud
Editor's note: Steve has found another area of the market where sentiment is so terrible that the vast majority of investors won't even consider it. But he's so bullish on this idea that he's launching a brand-new investment advisory dedicated to the topic. On Wednesday night, he's revealing all of the details in a free online event. You can't afford to miss this training session. Save your spot here.