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One of the things that's difficult for newer investors to understand is that many people who trade equities, including hedge fund managers and Wall Street veterans, do not do so in accordance with some hyper-rational set of rules or objective evaluation of fundamentals, but rather as a purely emotional response.
Of course, there are a lot of reasonable decisions made on the trading floor in response to what goes on in the world of business. A company that's struggling financially is likely to see its shares take a hit in a sell-off, and one that's bringing in record profits and paying dividends will generally see gains over time as more people buy in and the company's value is widely recognized.
But there are also a lot of reactionary trends that come from investor speculation on what might happen in the near future, usually driven by media coverage or analyses from various think tanks. These emotional responses tend to be cyclical, and taken together, we refer to this as the "sentiment cycle."
Playing the sentiment cycle is a key skill that investors need to learn, and I'm going to give you one great tip right here:
Don't follow the current trend of sentiment. Instead, exploit it for the best profit-making opportunities.
This isn't about simply going against the grain or assuming everyone is wrong. It's more about knowing how investors will react and figuring out the best play to make given that reaction.
I'm going to show you three examples here, each with 100% profit potential, based on what's happening right now...
Cyberwar Fears Will Drive This Cloud Computing Stock Higher
With sanctions on Russia ramping up, security experts warn that a retaliatory cyber-fight could be coming to the West.
Whether or not a full-blown cyberwar with Russia ever materializes doesn't matter from a short-term trading perspective.
All that matters is the cyber threat narrative driving stocks higher.
Case in point, the iShares Cybersecurity and Tech ETF (NYSEArca: IHAK) has climbed as much as 18.66% since Feb. 24, when Russia invaded Ukraine.
Last week, shares of most cybersecurity stocks pulled back a little in what looks more like a "profit-taking" move rather than a fundamental shift in the need for cyber defense. We know that the prevailing sentiment is still reacting to cyberwar fears, so this small pullback gives us a good window.
My favorite way to play it is CrowdStrike Holdings Inc. (NASDAQ: CRWD), the Austin, Texas-based provider of cloud-delivered protection across endpoints and cloud workloads, identity, and data.
CRWD gained more than 50% since Russia invaded Ukraine, but shares pulled back in last week's trading. That gives us an opportunity to establish a short-term trade to the upside as traders move back into the cybersecurity sector.
At this point, let's buy the CRWD May 20, 2022 $222/$230 call spread for $4.95 or less. Plan on exiting the CRWD May 20, 2022 $222/$230 call spread position for a 100% profit or if shares of CRWD close below $205.
Sales Soar for Popular Retailers Costco and Target
Last week, Costco Wholesale Corp. (NASDAQ: COST) reported upbeat March comparable sales. The news came as a surprise to investors worried about how revenue would hold up one year out from the last stimulus payments.
For the month, same-store sales jumped 17.2% in the five weeks ended April 3, comfortably ahead of consensus and led by a 19.1% increase in U.S. sales. Stripping out gasoline and foreign exchange, same-store sales climbed 12.2%.
So we've got another window here, where the general sentiment in retail has been wary, and the stock could still pull back for a bit until we feel the impact of those sales numbers bringing back some enthusiasm.
So I'd like to see shares of COST pull back just a little before targeting the company for another move higher.
If shares of COST trade down to $590 by April 15, 2022, I like buying the COST May 20, 2022 $595/$600 call spread for $4.25 or less. Plan on exiting the COST May 20, 2022 $595/$600 call spread position for a 100% profit or if shares of COST close below $570.
Meanwhile, the Costco report has had a secondary ripple effect on other retailers, driving confidence in the sector that has benefited other companies like Target Corp. (NYSE: TGT).
Shares of TGT jumped as much as 6.4% in Wednesday's trading on the heels of the COST results. That pushed shares of TGT up to the top of the range it's been trading at since March 1, 2022.
If the stock breaks out above current resistance, we could see shares start another run higher, up to $226 in the near term and $243 after that.
If shares of TGT trade above $230 by April 15, 2022, I like buying the TGT May 20, 2022 $230/$240 call spread for $4.90 or less. Plan on exiting the TGT May 20, 2022 $230/$240 call spread position for a 100% profit or if shares of TGT close below $205.50.
So as you can see, keeping a clear-headed perspective on the sentiment cycle can help you find a lot of great trades, especially in this volatile market. But for the long haul, investors are going to need some out-of-the-box thinking to find good places to park their cash.
Fortunately, in times like these, there's one thing you can always count on - the American entrepreneurial spirit. Right now, the next business visionary, in the same vein as Jobs, Musk, or Gates, is hard at work trying to make their dream a reality.
But they'll need help to do it, from angel investors with the guts to back a good thing.
Most people don't realize how lucrative startup investing can be - potentially up to 1650X better than stocks. And we've got one in our sights that is expected to pull in skyrocketing revenue over the next year, from $11 million to over $154 million.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.