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The Perfect Trade Trading Primer

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Let me show you an astonishing chart.

Yes, you are seeing that correctly. Practically ALL of the stock market gains from 1993 to 2018 occurred during the overnight session when the regular stock market was closed. Put another way, if you simply bought stocks at the open every day and then sold them at the close, you’d be break even over that 25-year period. However, if you bought stocks at the close of the market every day around 4PM and sold them at the open the next morning at 9:30AM, you’d be up almost 600% over the same time period. Think about this… trading during the day means making NOTHING for a 25-year period. But buying at the close and selling the next morning means producing a nearly 600% return. And by the way, the actual total market performance over this same time period was 550%... so you were actually BEATING a buy a hold investor who simply bought in 1993 and then held for the whole 25 years!

ThePerfectTradeTradingPrimer

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This trend continues to this day. Bloomberg has noted that throughout 2020, the real money was made holding stocks overnight rather than during the day. In fact, by the time the summer of 2020 rolled around, the stock market’s performance during the day was trending DOWN (see the chart below).

This is one of the best kept secrets in the investing business: that if you are simply trading or investing during daytime, you’re missing out on the bulk of the gains.

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Why is this? It’s hard to tell precisely. It’s tempting to argue that international investors who trade during their respective day times (when the U.S. is asleep at night) are driving the price action, but the fact is that the buying power from the U.S. stock market is so much larger than that of the rest of the world that this seems unlikely. You can see this in the chart below. The U.S. stock market is FIVE times the size of the next largest stock market globally. And if that doesn’t impress you, consider that you could combine EVERY stock market in Asia and Europe and the U.S. stock market would still be larger.

Given this discrepancy in size, I think it’s safe to say that the combined buying of international investors wouldn’t be enough to push the U.S. stock market around by much if at all. Another theory is that the markets are digesting international developments overnight, and so they tend to rally during that time. This is certainly more plausible, but it would mean that international developments have been the primary driver of stock market growth for

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the last 25+ years. Given that the U.S. is the largest economy in the world, accounting for ~25% of global GDP and larger than the second (China), third (Japan), and fourth largest (Germany) economies combined… this too seems unlikely. So, what is going on? I believe it’s because central banks use the overnight session to juice the markets higher. Before you label this as conspiracy theory, consider that the largest market that is open overnight is the futures market. And the futures market has a buying program that is specifically designed for centrals banks. It’s called the Central Bank Incentive Program (CBIP). It is extremely difficult to find out when the CBIP was introduced. The official documents claim it was created in 2013 and officially launched February 13, 2014. However, various studies claim to have actual data showing central banks were trading futures as far back as 2003. So, no one really knows how long this has been going on. What we do know is that Central Banks do buy futures in large enough amounts that the futures exchanges developed a specific program that allows central banks to buy futures at a discounted rate, meaning for cheaper fees than other participants. Now, I know what you’re wondering: is the Fed involved in this? Technically the Fed shouldn’t be allowed to do this because it is the U.S. central bank (see the qualifications for the CBIP in the image below). However, you’ll also note that an “international organization of central banks” would technically qualify.

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Put another way, there is a loophole through which the Fed, if it worked with other non-U.S. central banks via an organization, could participate in the program. It this seems like a stretch, consider that the Fed is legally not permitted to buy corporate bonds, corporate bond ETFs, municipal bonds or any of the other assets it bought in 2020 to stop the COVID-19 market meltdown. The Fed got around this issue by printing money, giving it to the Treasury Department, which then used credit facilities to buy these asset classes. The Fed could do something similar with other non-U.S. central banks to participate in the CBIP without any issue. Bottomline: whether it’s the Fed or not, we know that central banks DO buy the futures market. And this is the market that is open in the overnight session when trading volume is lightest and the markets are easiest to manipulate. Put simply, “someone” is juicing the markets higher in the overnight session. We know this because, as I pointed out before, the markets are ramping during the overnight session to the point that ALL of the market gains of the last 30 odd years have occurred in the overnight session. Now, a 600% return over a 30-year period is nothing to sneer at, but for those of us who are looking for truly extraordinary returns, we need something to turbo charge this overnight phenomenon. Put another way, we need to find what areas of the market are EXPLODING higher during the overnight session. After all, why bother trading the entire market when you could focus on the single best performing sector? For instance, imagine if, instead of trading the S&P 500 ETF (SPY) in the overnight session, you had traded the Energy ETF (XLE), over the six months in the chart below. Suffice to say, XLE rallied over 60%, while the SPY was up just 20%.

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I’ve designed a trading system to do precisely this. It’s called The Perfect Trade, and it screens the ENTIRE stock market for the single best performing sector. It then identifies the one or two stocks in that sector that are most primed to explode higher. And that’s what we trade… buying it in the last hour of trading, and selling it during the first 30 minutes of the next day. So how does it work? The screening system used by The Perfect Trade is in fact extremely complicated. And unless you’re someone like me, who lives for this stuff, running through all of the details would likely put you to sleep. So for brevity’s sake, I’d explain it as such. The entire The Perfect Trade is based on a mathematical system called “spread analysis.” What this consists of is running the relative performance of every given sector in the market against the market as a whole. I mentioned the Energy Sector (XLE) earlier, so let’s use it as an example.

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Below is the spread between the Energy Sector (XLE) and the broader market (the S&P 500 ETF or SPY). In the simplest of terms, when XLE is outperforming SPY, this line rises… and when XLE underperforms SPY, this line falls. I’ve illustrated the times in which XLE was outperforming SPY with green rectangles in the chart below. Those were times in which XLE would have been a better trade to make overnight than the S&P 500.

All in all, there are a total of 11 sectors that make up the S&P 500. They are:

Sector Symbol Communication Services XLC Consumer Discretionary XLY Consumer Staples XLP Energy XLE Financials XLF Health Care XLV Industrials XLI Materials XLB Real Estate XLRE Technology XLK Utilities XLU

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The Perfect Trade runs THREE separate trading screens on EVERY spread in the S&P 500. Again, the actual system is quite complicated so for the sake of clarity I’ll just say we are screening all of these spreads over the intermediate term, near-term, and immediate term. We are essentially looking for setups in which a spread looks good based on what it’s been doing for a number of weeks, a number of days… and today itself. It’s this last trading screen that is most critical… because we don’t want to find which sector is looking good in the future… we want to find which sector is about to EXPLODE higher overnight right now! To do that, our final and third screen runs the spreads on a 5-minute basis every day. I’ve presented a sample of this screen in the chart below:

As you can see, on this particular day, Energy (green), Industrials (orange) and Materials (dark orange) were the big leaders. Based on this, we’d run our intermediate and near-term trading screens on these three sectors. Whichever sector scores high on ALL THREE screens would be the one we’d want to trade. Now, obviously, you could make some decent money trading ETFs in the overnight session. It’s not unusual for an ETF to rally 2% even 4% or 5% in a given day as the below chart of XLE shows.

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However, The Perfect Trade isn’t interested in just making 4% or 5% on a given day. I’d like to see gains of 20%, 50% or even 100%. To do that, we trade options on specific stocks in a given sector. If you’ve never traded options before, it’s much simpler than you might think. In fact, we have a special report dedicated to showing you the basics. You can find that report on The Perfect Trade website: https://phoenixcapitalresearch.com/theperfecttrade/ In The Perfect Trade, we prefer to use weekly options. That is, options that expire on the Friday of the given week in which an intervention occurs. And we don’t trade options on the ETFs, we trade options on the single best performing stocks in a given sector. Why do we do this? Because an ETF consists of a basket of stocks, so it’s more diversified so it tends to rally less. And why do we trade weekly options on the stocks? Because the closer you get to a given options contract’s expiration, the more volatile the option pricing. It might seem strange, but we want increased volatility.

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Remember that The Perfect Trade focuses on trading overnight rallies in the top performing stocks in the top performing sectors. In this context, increased volatility means MASSIVE price spikes occur in these companies’ options when their share price moves higher overnight. And since we’re trading options that typically expire in the same week, these profits can hit at lightning speeds. I’m talking about gains of 30%, 50% even 100%. I realize this is starting to get rather complicated, so let’s break it down in simple bullet points. The Perfect Trade …

1. Analyzes the entire S&P 500 on a sector-by-sector basis through a process called “spread analysis.”

2. We run each sector through THREE separate trading screens (intermediate, near term, and immediate).

3. We take the top-performing sector from our three screens and only trade the best performing stock in that sector.

4. We buy weekly options in that stock around 3PM before the market closes.

5. We hold these trades overnight, to take advantage of the overnight market move.

6. We sell our weekly options the next morning.

That’s it in a nutshell. I know it all sounds complicated, and it is. But when I send out a trading alert, I won’t be including all of this information. Instead, I’ll simply tell you what the top-performing sector is, what’s the best stock to trade in that sector, which option to buy on that stock, and what price to pay. Put another way, I’ll do ALL the grunt work for you. All you’ll need to do is open your brokerage account and trade the option! And then when it’s time to sell the next day, I’ll send out a sell alert, telling you it’s time to close the trade. That’s it. Truth is, it couldn’t be easier.

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This concludes our primer for The Perfect Trade. I suggest heading over to The Perfect Trade website to learn more about this system and how it works. That website again is: https://phoenixcapitalresearch.com/theperfecttrade/

GrahamSummersChiefMarketStrategistPhoenixCapitalResearch

BestRegards,