P.S. This mismatch between expectations and reality is something I’ve focused on throughout my trading career. And when you get it right, it can lead to some truly outsized gains.
Traditionally, I’ve used options to capitalize on an anticipated repricing.
Yet over the past few months, I’ve been working on a completely different strategy… It takes advantage of a brand-new market most people aren’t paying attention to… yet. But it’s growing fast and offers a whole new kind of profit potential. I’m talking double- and triple-digit gains in a matter of days – if not hours.
Tomorrow at 8 p.m. ET, I’ll show you exactly how it works. All you have to do is click here to add your name to the guest list.
I’ll even send a free trade to everyone who attends when my next setup appears after the event. So make sure you’re ready to tune in tomorrow night!
The Federal Reserve’s meeting kicks off today – the first with Kevin Warsh as chair. No one expects a rate change. But professional traders aren’t focused on predicting the outcome. They’re focused on something more useful: what the market is already pricing in.
Because by the time a Fed decision arrives, investors have already spent weeks positioning themselves for a range of potential outcomes.
That’s why the biggest moves often don’t occur because the news is “good” or “bad.” Instead, they happen when reality differs from what investors were expecting.
When markets are surprised, some of the best opportunities can emerge…
You’ve likely seen a stock fall heavily after a blowout earnings result. It can make you scratch your head…
Say the company beat estimates by 30%. Why would investors punish that kind of good news? The reality is that the market was likely expecting an even bigger result.
It’s the same thing on the negative side. A stock can rally after producing what looks like terrible earnings. But in this case, maybe the market was expecting much worse.
When expectations become detached from reality, some of the best trading opportunities begin to emerge.
For example, a stock can get bid up so far that it can’t possibly match all the hype. In that case, the smallest piece of bad news can send the stock price tumbling.
We’ve seen that play out in the semiconductor stocks that have driven much of this year’s rally. And we may be seeing it with the recent SpaceX IPO.
SpaceX’s (SPCX) valuation is massively stretched against its underlying fundamentals. To be clear, I’m not saying that it’s a bad company.
But at its current valuation, investors appear to be pricing in years (if not decades) of near-perfect execution. That becomes an increasingly difficult expectation to match…
Rather than trying to predict future outcomes, you need to look for situations where the market is disconnected from reality.
Sometimes markets become too optimistic… and other times too pessimistic. And sometimes they become so focused on a particular narrative that they lose sight of other possible outcomes altogether.
Take a potential takeover target. Investors can get so focused on the possibility of a buyout and specific deal structures that they ignore the risks if a deal never materializes or falls apart.
Once the takeover premium disappears, the stock can reprice very quickly.
The lesson is simple. The next time you see a stock plunge on good news (or rally on bad news), remember that the market isn’t judging whether the outcome was good or bad. It’s judging whether the outcome was better or worse than investors were anticipating.
That’s why successful traders don’t waste their time trying to predict the future. Instead, they’re looking for situations where they can take advantage when the expectations mismatch unwinds.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
