Diversification is not just a myth – it’s Wall Street’s biggest, longest-running scam.
Two kinds of people will tell you to diversify: People who don’t know what they’re doing…
Or the folks on Wall Street trying to separate you from your money.
The pros want you diversified for two reasons:
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Diversification means you’re buying into a bunch of positions you don’t need. And when you do, they’re making out like bandits on fees and commissions (or more likely these days, selling order flow).
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Diversification also means you’re not focused on the market’s biggest trends. So your profit potential is limited. Your money is tied up in gold, bonds, inverse funds, commodities, income, and whatever else. And Wall Street pros have the market’s best, most profitable trades in a chokehold.
Don’t believe me?
The biggest stocks of 2023 prove my point…
The Mag 7 Are the Best Argument Against Diversification
When it comes to Wall Street, it’s best to ignore what they say and watch what they do.
And if you do that, you’ll soon realize they’ve been lying to you about the importance of diversification.
The so-called Magnificent 7 are a great example…
In 2023, these 7 stocks were responsible for 71% of the overall market’s total gains for the year.
In fact, they’ve been so dominant over the past year that they’ve actually changed how most hedge funds invest.
A hallmark of hedge funds has always been portfolio management that is diversified and dynamic. And all that diversity and activity adds up to – theoretically – market-beating returns.
But since the Mag 7 emerged, hedge funds have narrowed their focus in a big way…
A recent report from Goldman Sachs examined the holdings of 735 funds with a whopping $2.4 trillion in assets under management. It found that the Mag 7 currently makes up 13% of the overall long positions in hedge fund portfolios. That percentage has doubled since the start of 2023.
What’s more, the net exposure of these funds to just seven stocks rose from 12% to 99% over the course of 2023.
Think about that…
Net exposure is the difference between a hedge fund’s short positions and long positions – and right now, they’re 99% long. As far as the Mag 7 are concerned, the hedge funds have all but taken down their hedges.
So while Wall Street has been telling retail investors to diversify for decades, they pile in whenever the trend is clear – to hell with diversification.
But breaking away from this conventional wisdom can help you unlock your true profit potential in any market.
That’s why I created One Ticker Trader…
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One Trend, One Trade
My One Ticker Trader service identifies the market’s biggest trends and allows traders to move in and out of a single ticker symbol to maximize their profits.
In January, we targeted the Invesco QQQ Trust (QQQ), an ETF that tracks the Nasdaq. It’s wildly overweight the Magnificent 7. So it’s one of the best ways to trade the biggest trend in the markets right now.
In January, we opened a short trade on QQQ by buying a put. (When we zero in on a single ticker, we can trade it up, down, or sideways, depending on what the market is giving us.) After the sell-off to start the year, the goal was to capture a retest of QQQ’s January 5 low.
So let’s see how it went…
Trade: QQQ March 15 $390 Put
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Bought on January 10 for $4.32
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Sold on January 17 for $5.39
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Gain of 24.8%
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Holding period: 7 days
After that pullback in the first week of January, QQQ rallied off its January low.
At the time, QQQ was also retesting its levels from December 13 – the time of the Fed’s last meeting. QQQ rallied off that level, and a consumer price index (CPI) report was due out the following day.
So we thought that the market could be getting ahead of itself and vulnerable to a reversal.
You can see the setup in the QQQ chart below…
The trade didn’t immediately go our way. But QQQ struggled to rally, registering lower highs over the following three days.
Then QQQ dropped on January 17 and put our trade in good profit. We closed out our trade by selling our put option for a 24.8% gain.
As you can see in the chart, we got the timing of our exit exactly right…
Had we held on in anticipation of further profits, we would have handed back all of our gains.
It’s this kind of quick profit-taking that we aim to repeat throughout 2024.
We’ll do that by following Wall Street’s lead – and focusing only on the biggest trends in the market.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict