Trading Sector Moves

I like trading in-play "special stocks", such as earnings or contract winners (or some another powerful catalyst), as much as the next person. However, I also love trading sector moves. I'm a firm believer that sector moves are a high probability setup (which I will explain in a later post), and allow traders to reach the "next level" of trading. 

Imagine having a single in-play stock, such as a $5 tech stock doing 2 million volume. Let's say your liquidity cap is 100,000 shares, meaning you could comfortably trade $500,000 of the stock. A 10% move would be a nice $50,000 gain.

Now take a sector move. During a brief period, an entire sector of stocks becomes correlated and makes big moves. It is essentially a single trade idea, but now I can deploy capital across many stocks. That entire sector could absorb millions of shares intraday and you can swing size. 

In the last several trading sessions, the materials sector has been extremely volatile and in-play. You can see a chart of $XME below:

The last 5 trading sessions all had high relative volume, and the increasing volume shows increasing interest.

I think a big catalyst was the anti-dumping tariffs placed on Chinese steel that happened last Wednesday, leading to powerful runs in steel stocks $X and $AKS. Combined with higher commodities prices, all sorts of commodities stocks were being taken up in the run. Some of the heavily shorted oil stocks made huge runs over the span of a few days as speculative money flowed in, such as $SDRL, $LNCO, $LINE, $EPE, $DNR, etc. The junkier the company, the more it gained on percentage terms. And if the company had any kind of catalyst to bring attention to the stock, the volume was there.

Trading the sector moves allowed huge returns to be made. It was almost effortless.

This has led me to the realization that effortless trading could be found if I just sat on my hands and waited for the few times a year when a sector becomes in-play.