Can You Handle a Zero-Sum Market?

By: TradeSmith Research Team

Jul 23, 2021 | EducationalInvesting Strategies

Editor’s Note: Today we’re sharing a guest editorial from Jeff Clark, editor of Market Minute at Legacy Research Group. As everyone starts to hold their breath in anticipation of a bearish turn in the market, he’s talking about an interesting pattern that can help people find profits even in a stagnant market. We think you’ll be interested in what he has to say. Read on for more details, and we’ll be back on Monday with our own thoughts on ways to invest in the market, regardless of its direction.


Imagine a stock market that goes nowhere for the next 12 months. 

What would you do?

Would you stick with the old “buy and hold” strategy, knowing you wouldn’t make any money at all? Or would you try to adapt to the environment and find a way to profit?

These aren’t unreasonable questions. 

After all, history shows that buying stocks at lofty valuations usually generates subpar returns. So, with the S&P 500 currently trading at a lofty 22 times earnings, and with interest rates about as low as possible, the broad stock market is likely headed for a long period of choppy back-and-forth action. It is quite possible most stocks will go nowhere for the next 12 months or longer.

How will that feel? 

Well… just ask shareholders in IBM (IBM), Intel (INTC), AT&T (T), Citigroup (C), Exxon Mobil (XOM), and any number of other blue-chip stocks that haven’t done anything since 2018. That’s right… all of these stocks trade today for just about the same prices they traded at three years ago.

Of course, these stocks didn’t just flatline. They had rally phases. And they had decline phases. But if you bought any of these stocks three years ago and held on until today, you made nothing.

That’s what we call a zero-sum market. 

That’s a tough environment for typical buy-and-hold investors. But it can be a paradise for traders.

Think about it this way…

Buy-and-hold investors who bought shares of technology behemoth Cisco Systems (CSCO) two years ago have earned nothing. The stock has gone higher, and it has gone lower. And those moves have canceled each other out – creating a zero-sum movement.

Traders, though, could’ve had a much better experience – by waiting patiently for a very specific pattern to emerge and then taking advantage of that pattern to achieve large, fast gains.

This is how I’ve booked 14 different 100% gains this year alone.

For example, I targeted Cisco for my subscribers last October. We had CSCO on our watchlist and waited patiently for a specific pattern to emerge. As soon as it did, we booked a 120% gain in just 16 days on a single recommended trade.

Rather than buying and holding the stock for two years and making nothing, we traded CSCO and saw the chance to more than double our money in about two weeks. That’s the sort of action I expect we’ll see much more frequently over the next three years.

The pattern that triggers these fast, profitable trades is something we call an “M-Wave.” It shows up in stocks that are stuck in zero-sum movements.

It showed up in the chart of CSCO last October. It showed up several times in Citigroup (C) last year. It showed up in a lot of gold stock charts this past spring (which is how we’ve booked nine different 100% gains in the precious metals market this spring alone). And, as the market morphs into a zero-sum environment, we should have lots of opportunities to trade this pattern in the weeks and months ahead.

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