Earlier this week, you saw me tell Stuart Varney on his Fox Business Network show Varney & Co. about the actual results of what has happened after every government shutdown since 1981.
What I didn’t tell him was how to profit from this historical trend.
For several weeks now, I’ve been promising a special options trade just for 10-Minute Millionaires – a little taste of what my elite subscribers get every week in Stealth Profits Trader. And the recent shutdown is the perfect opportunity to deliver on that promise.
Today, I’ll give you a few of the details of the market’s reaction after every shutdown – and then we’ll look at a trade that puts those probabilities on our side.
This is a short-term trade – because the “shutdown effect,” historically, takes just ten days to start working.
And, like most of the options trades I recommend, it has triple-digit potential.
Here’s what you need to know – and how to profit.
The Shutdown Is A Time-Honored Tradition – And A Political Tool
Let’s get some quick context about government shutdowns and then jump into our trade.
There have been 18 government shutdowns in modern times. However only the 12 that have happened since 1981 have the characteristics that we associate with the recent shutdown – namely the temporary furlough of large numbers of workers.
What changed between the six shutdowns that happened in the 1970’s that affected only a few things and the more impactful 12 that hit since then?
Strangely enough, the big change was a pair of legal opinions written by Attorney General (AG) Benjamin Civiletti in 1980 and 1981.
The basis for shutdowns actually has support from The U.S. Constitution itself. Article I, Section 9 reads, “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”
Support for this section of The Constitution is provided by the Antideficiency Act that dates back to an 1870 law that has, of course, been updated over the years.
It wasn’t until AG Civiletti’s opinions that the enforcement actions for expired congressional appropriations gained significant teeth.
The only expenditures that could continue during a government shutdown, Civiletti opined, were those where there is a connection “between the function to be performed and the safety of human life or the protection of property,” or where otherwise “authorized by law.”
So with that backdrop, the “government shutdown” has been used as a political tool by both parties since 1981.
Ten Days After A Shutdown, This Market Chart Turns Green
My fellow quants over at Paststat put together this dandy breakdown of how the S&P 500 has responded to the past 12 shutdowns. Note that t+1% means percent change one trading day after the event, t+2% is the percent change two days after the evert, etc. Here’s the data:
Note the area I’ve marked in blue.
While the results 1 to 5 days after a shutdown have been 50/50 in terms of results, after 10 days, the market was in positive territory every time. And after 20 trading days (that’s about a full calendar month), the market was higher 9 out of 10 times.
While this analysis wouldn’t make it into a PhD’s thesis paper, it does indicate an edge for us as traders.
Why does the market go up after a government shutdown?
After all the political bluster leading up to a political shutdown, the event itself becomes a “sell the news” moment – meaning go the opposite direction of the news. Government shutdowns are posed as bad (libertarians out there will disagree), so once it one actually happens, the market has already anticipated the event, and heads in the opposite direction or up.
That leads us with an edge for playing a continued push to the upside for the markets.
Let’s jump into our trade:
Find the Extreme
The Nasdaq index, with its emphasis on technology stocks, has been a market leader throughout most of this bull run. We’ll look to this index to give us the biggest “bang for our buck” in this quick-hitting trade.
Note that in very strong bull moves like we’ve seen so far in 2018, pullbacks are typically very shallow as we see below. Here’s the chart:
Now let’s get our protection and targets in place:
Frame the Trade & Book the Profit Action Plan
This is a momentum continuation extreme, with an edge provided by post government shutdown price history. Our expectation is for a move up in between that 10 and 20 day sweet spot we saw in the data above. Here’s our option selection along with our protection and profit target:
Buy: QQQ February 9, 2018, $171 Strike Calls (QQQ180209C00171000) at the best available price up to $1.75. Do not pay more than this limit price.
Stop-loss: Apply 2% of your core capital or 5% of your speculative capital. Exit the trade if the price drops by 50% of the premium you paid.
For your profit-taking exit: Sell 50% of your contracts at a 100% profit, and hold the remaining contracts for further guidance.
What to Watch
The markets have had very little downside price action since the beginning of the year. Remember that we are playing probabilities here, not certainties! Place your stop so that you protect your trading capital while giving this trade some room to run.
Great Trading and God bless you,
D.R. Barton, Jr.