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Don't Overthink Your End-of-Year Trades

The last couple of weeks of the year are always a little strange in financial markets. Traders and investors are focused on the holidays and most trading is about tax considerations and positioning for the coming year rather than current fundamental or technical factors. That doesn’t mean, however, that it is impossible to trade profitably at this time.

If anything, it could be argued that because long-term bets are such a significant part of the action at the end of the year, and because such trades are usually based on somewhat obvious logic, it is a good time to make a little money. If you are to do so, though, don’t overthink it: stick to the obvious.

Traders should then, rather than guessing at what they think might happen next year, get positioned for something that everybody believes will happen. The Fed has stated that they will be gradually “normalizing” short term interest rates, for example. To see who are the obvious beneficiaries of that trend, you need look no further than the reaction following last week’s announcement to that effect. Within a few minutes of the Fed raising short term rates the banks, led by Wells Fargo (WFC), started to raise the prime rate, the interest they charge on loans. Nobody, however, passed the rate increase onto savers.

Before we all throw our arms up in disgust and start to rant about the blood-sucking, evil banks, though, it is worth considering that those banks have mostly been effectively subsidizing money market accounts during much of the era of zero interest rates. I know it is hard to summon up sympathy for big banks with billions in profits, but in this particular case the rise in short term rates is more of a relief for them than an opportunity. That applies even more in the case of other financial institutions, brokerage houses and insurance companies than it does for the banks. That makes a broad based, sector ETF such as XLF the best way to play the move.

Conventional wisdom is that rising rates helps financial stocks generally, but given the abnormal circumstances over the last few years, that effect is expected to be exaggerated as we move up this time. Whether that actually turns out to be the case or not depends on several things other than interest rates, but for the purposes of this trade, that is not the point. If enough people believe it will happen and buy financial stocks going into year’s end, then a profit can be had in the short term as that positioning takes place.

The other “obvious” trade for next year is to be long large, multinational oil companies. The theory is that oil prices will at least stabilize, or more likely actually recover next year...I mean, it can’t go any lower, can it?

Actually it can, but that is not the point. If enough people believe that to be true, and that large oil firms may even benefit from trouble by picking up heavily discounted assets as smaller firms go under then the likes of Exxon Mobil (XOM), BP (BP), and Chevron (CVX) can track higher, whatever happens to oil. Again, whether that actually pans out or not, money can be made over the next couple of weeks as others position themselves based on that opinion.

Ultimately, there will be much ink spilled and electrons wasted on opinions as to what are the best plays for next year. I will be offering my thoughts alongside everybody else, but in the short term, rather than acting on any of those opinions, the smart trade is simply to position yourself to benefit from what others see as the “obvious” trades. Staying long XLF and big oil stocks for the next couple of weeks is the best way to do that.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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