3 Safe Trades Leveraging The Market’s Biggest Trends

While the market tests new highs, some stocks and ETFs seem destined to fall. These three contrarian plays make great trades right now, and could be some of your most profitable moves for all of 2016.

Changes are coming in three major areas of the market, and being on the right side of these trends will make you large profits in the months to come. All of these changes are still uncertain. In the form of questions, they are:

  1. Will the Fed raise rates?
  2. Are speculative, non-fundamental metrics still driving stock growth?
  3. Is the energy sector at the end of its bear market?

For each one of these questions is a logical answer and a corresponding trade. These trades will be some of the most profitable trades for 2016. Let’s tackle them one-by-one:

Will the Fed Raise Rates?

The beginning of 2016 showed less focus on interest rate speculation, considering that the Fed just raised rates in December. But now, nearly halfway through 2016 and no rate raises, investors are asking when the previously planned “two to four” rate raises will come. In the recent weeks, many Fed presidents have turned hawkish, implying that the Fed will be raising rates soon.

However, last week we witnessed the release of negative reports for the US economy. As the Fed now claims it will raise rates per decisions based on hard data, these reports contradict the hawkishness of the Fed presidents. Job numbers have coerced many investors to drop or reverse their speculations that a rake hike is imminent.

Are they right? This is the question many investors are asking, yet it is not the only important question. Perhaps a more important question is, “Assuming the rate hike comes, are these holdings the right positions to leverage interest rates?”

My answers to these two questions are “yes” and “no,” respectively. First, yes, the reverse on interest rate speculations is the correct direction. Looking to direct bets on the interest rate hike decision gives us the best indication, as money is at stake (instead of just analysts’ reputations).

CME Group is now showing a mere 4% probability for a rate hike in June. Moving further into the year, we see the probability of a rate hike before November at only 49%. Money speaks: The likelihood of a rate hike before September is low, implying that we should bet against a rate hike.

The second question – one few are asking – is whether investors are using the right vehicles to play the rate hike trade. Many investors piled into financial stocks, hoping for a surge after the rate hike. Theoretically, financial stocks, such as banks, benefit from the rate hike by allowing them to charge higher rates to their customers, thereby creating higher margins.

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