How do you know when stocks that have been falling for 2 years, and dropped by 25%, have finally bottomed?
If you’re a longtime Leadingtrader subscriber, you know by now the major signs of a bottom to look out for:
Everyone is bearish. Investors have given up. The news headlines keep getting more negative. Divergences appear between price and momentum.
But there is an even BIGGER signal of a bottom that you may not have heard about. And it’s happening right now on some of the world’s most hated stocks.
Firstly, just think about that for a minute.
Why would greedy Wall Street – which has no conscience and no morality – want to help you make more money?
Answer: It doesn’t. But more on that in a minute…
So how does Wall Street “help” people bet against the hated market?
Usually by creating financial instruments – such as inverse ETFs – to help you short (or bet against) the falling stocks. So for example, if you were to buy the inverse ETF of “fast car” stocks, then if the stocks of fast cars go down, the value of your inverse ETF would go up.
Last week the Wall Street Journal reported that:
“New ETFs are in the works to allow traders to profit from the struggles of brick-and-mortar retailers.”
Got that?
Wall Street knows that people are super-bearish on the retail industry. And now it wants a cut of the action by creating ETFs to help “Mom and Pop” investor to bet against retail stocks.
But here’s something important that the Wall Street Journal also said:
“Contrarians, take note. Such niche launches of exchange-traded funds have regularly presaged turning points in their respective markets.”
That is absolutely correct. Take a look at this chart of the retail sector (XRT):
The ETF for retail stocks (XRT) has been in a downward trend and bear market for 2 years. Most retail stocks like Macys and JCPenney are down more than 60%.
But now we are seeing signs that retail stocks could be start to bottom.
The above chart of XRT shows that retail stocks are perhaps forming a “double bottom” pattern – and could be about to complete a long term correction (wave 4). If we see a close above 42, that would be a strong indication of a long term bullish reversal.
Last week I spoke about JCPenney stock and why it could be closer to a bottom.
However, a close below 38.50 on XRT would indicate that the downward trend is not yet over.
Hope it helps!
For more up-to-date analysis of stocks and markets, try our trading service on www.leadingtrader.com