MINNEAPOLIS (Stockpickr) -- The stock market is moving in big swings over the last month thanks to or at least perceived to be impactful news events. We've seen stocks go up hundreds of points in a matter of minutes. We have also seen the opposite.
The big swings are tough for any investor to swallow. We can blame high frequency trading or aggressively short institutional hedge funds for the volatility. Complain as we might these two things are not likely to go away any time soon. The best defense for this seemingly nonsensical trading market is to utilize pair trades.
Don't bother trying to predict the direction of the market in this crazy environment. Instead focus on individual pair trades whereby you buy one stock long and match that trade against one stock short. A portfolio of several of these pair trades is designed to help you achieve absolute returns - a positive profit while protecting your capital.
Given the huge action in the gold and Treasury markets it would seem like there is a huge audience of investors interested in safe havens. As we have seen with gold over the last two days, I'm not so sure buying gold is a safe haven given the approximate 10% decline in gold prices. Pair trades make much more sense in my humble opinion.Related: 5 Euro Stocks From 5 Countries There are many ways to implement a pair trade strategy. This week my focus will be simple. I want to be long stock stories that are working and short stock stories that are not working. That may sound simplistic, but I will show you how you can do this very effectively. We are at a tipping point with stocks. I follow closely companies reporting earnings. I am seeing a significant shift in tone and results over the last two weeks. Those businesses reporting operating results are missing expectations or at a minimum lowering guidance for the future. I would think of it as rolling over. When that happens, stocks tend to go lower and by lower I mean down in a big way. On the flip side, there are still stories that are working. The market often misses the mark when there is broad based selling. Such discounts allow investors to buy companies that are beating estimates and raising guidance at attractive prices. It is a really good environment to execute a pair trade strategy. Keep it simple with these 2 pair trades for big swings in the market:
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