One recent analysis paints a very different picture of the U.S. economy than what it looks like on the surface. A broad look at things shows us that the major indices keep hitting record highs, the dollar is strong, and things look like they will keep going this way. But if you look into it a tiny bit deeper, it becomes clear that not all of the market is as rosy as this. Some sectors of the market are outperforming others, and they are buoying the rest of the market with them. Small cap stocks, biotechnology, and banking stocks are doing better than ever, and they seem to be pulling other sectors upward with them.
For now, this is a good thing. It’s leading to more and more growth, and there’s a chance that this type of growth could help other sectors get to the levels that biotech and banking are at, especially if the small cap companies lead the way there with their unprecedented growth. But, experienced traders know that when market success is hinged upon something so small, a misstep here or there can cause a big drop, even a recession. This has happened time and time again as different bubbles have burst, causing markets to crash down around them.
Over the last two and a half weeks, the U.S. market has pulled back about 2 percent. It’s not an uncommon occurrence, but it is uncharacteristic of what the market had been doing in the several months before then. Some of the blame can be pointed to these outperforming sectors losing steam. The professional traders are not missing what this point could mean. Hedge funds are now holding more bearish positions than they have been since last October. When big name professional traders do something, the rest of us should take notice. Following the big money is a great trading strategy, as long as it’s done quickly and accurately.
For those of us that do not have easy access into the mind of a hedge fund manager, watching ETFs can give us a feel for what is going on behind the scenes. The SPDR S&P Bank ETF, for example, has been a standout fund over the last few months, and it is indicative of what is happening in the banking industry. Another ETF that’s been outperforming others is the iShares US Healthcare Providers ETF. It is designed to mirror how well health insurance companies are performing, and it has gone up about 38 percent over the last twelve months. It’s also currently sitting near its all time high. This is not a surprise as health insurance often walks lockstep with the ever growing healthcare and biotech sectors. The implementation of the Affordable Care Act hasn’t hurt things, either.
One extra thing to note is that bank shares have an added weight of importance to them. These are what led to the 2008 market crash, and if they are holding up in price despite all of the warnings coming from the Fed about rate hikes, it seems that the economy truly is improving. This is a good sign for long term growth, but not a great sign for short term traders that want to go bullish. The best move by you is to put yourself in a position where you can profit off of prices when they go down, too. This can be accomplished through both selling stocks short or binary options. When the Fed does raise rates, and bank stocks drop significantly, this could be a bad sign, and could send the market downward much faster than expected.