If You're Not Using This Strategy Yet, Here's a Trade for You

Where the markets will go from here is anybody's guess...

We're more than nine years into a bull market. And the major indexes are at or near all-time highs.

How long will it last?

People who tell you they have the answer to this question are guessing. And while some guesses are more informed than others, you should not risk your overall financial well-being on market predictions.

Fortunately, you don't have to. If you use a specific strategy, you can make money in stocks no matter where the markets go from here – up, down, sideways, or any combination of the three.

Today, we'll explain how it works. And we'll share how you can get started with one of our favorite trades...

This opportunity harnesses the power of "pairs trading"...

If you're not familiar, a pairs trade is when you buy one asset (betting that it will go up), sell another asset short (betting that it will go down), and treat the two positions as one trade. Your return is the average of your two individual returns.

As I explained last week here in DailyWealth, the result is a pair of trades that is "market neutral"...

In other words, a pairs trade is equally likely to profit whether the asset class rises or falls.

For example, if you buy one stock and short another stock in the same industry, your profits aren't tied to how that sector performs... or even how the stock market performs as a whole.

The pair of trades generates profits if the asset you buy performs better than the asset you short. That's why pairs trading is a fantastic way to make money without taking broad market risk.

Today, we're profiting from this idea – with a trade that capitalizes on the big shift in how folks move money...

We'll start with our short half of the position: $8 billion global money transfer firm Western Union (WU). This company offers expensive, inconvenient money transfers... while newer businesses with better technologies are nipping at its heels.

Last year, Western Union generated sales of $5.5 billion. That's down 2.5% – or about $140 million – from five years ago. Its profit margins have fallen from 19% to 14.2% over the same period. And its earnings per share ("EPS") are down 5% over that span.

We want to profit from Western Union's continuing decline. But seeing as we're in a bull market – and most stocks, good and bad, rise in bull markets – we also want to reduce our risk.

So we're pairing our short position in Western Union with a long position in the ETFMG Prime Mobile Payments Fund (IPAY)...

IPAY is a $450 million fund that holds a basket of roughly 36 companies involved with mobile and electronic payments. Its biggest holdings include Visa (V), American Express (AXP), Mastercard (MA), PayPal (PYPL), and Square (SQ).

These companies offer better, more convenient technology than Western Union... at a better price.

With this pairs trade, we can benefit from the trend in payment technology.

Even better, we can make money no matter how the payments sector or the overall stock market perform... as long as IPAY outperforms Western Union.

So far, that's exactly what's happening.

In the chart below, you can see that IPAY has outperformed Western Union over the past several months...


You'll notice we can't use a standard price chart for this combined pairs trade, the way we would for a single stock. But we can use a ratio chart. By dividing IPAY's share price by Western Union's share price, we can see that this pairs trade is in a powerful uptrend...


This trade is in great shape. It's a way to bet on the digital-payments shift, without taking broad market risk. And the latest action could be the start of a big move higher.

So if you haven't tried placing a pairs trade yet, you can get started with IPAY and Western Union right now.

If it seems difficult, don't worry. All you need to do is buy IPAY and short an equal dollar amount of WU. It's that simple.

We suggest using an 8% hard stop on the combined position. So if IPAY underperforms WU by 16 percentage points from the time you place the trade, you should close out the pairs trade. (Again, your return on a pairs trade is an average... You will take the difference of your two positions and divide by two. So half of negative 16% is a loss of 8%.)

The markets are tough to figure out right now. Some folks, like my colleague Steve Sjuggerud, are predicting a big, rapid move higher. Others say the market has peaked.

Our own outlook is still bullish. But we know the market can turn on a dime. That's why we love pairs trades... They can generate profits no matter which way stocks are moving.

Pairs trading is a fantastic strategy for today's market. Make sure you're taking advantage.

Good trading,

Ben Morris and Drew McConnell

Editor's note: Pairs trading is one of the few strategies with the potential to make you thousands of dollars a year – whether stocks rise or fall. And right now, for an extremely limited time, you can gain access to all of Ben and Drew's pairs trades at a 40% discount to the regular retail price. Find out how by clicking here. (Please note, this link does not lead to a long promotional video.

Further Reading

"Stocks go up. Stocks go down," Ben writes. "Yet most individual investors only prepare for stocks to go up." Find out how market-neutral thinking could help rescue your portfolio in a sudden crash right here: Do This to Protect Your Downside and Earn Bigger Profits.

"Once you understand this strategy – and especially once you begin to use it – you may never invest in stocks the same way again," Ben says. He explains why pairs trading is one of the best techniques for today's market... Read more here: Three Ways to Win... No Matter Where the Market Goes.

DailyWealth Premium

Market gurus benefit from years of experience and dialed-in strategies. Recently, Ben Morris shared a strategy that legendary investor Paul Tudor Jones used to become one of the greatest traders in history...

Market Notes


Today, we're revisiting a company that's transforming the food-delivery business...

In the past, if you wanted food delivered, you had limited options. Smartphones changed all that. Now, folks can access more choices than ever before with the touch of a button. And thanks to today's company, it has never been easier to get food from your favorite restaurants delivered straight to your door...

We're talking about Grubhub (GRUB). The food-delivery platform connects users with more than 85,000 local takeout restaurants in more than 1,600 cities. Giving customers a wide range of choices is great for sales growth... Last month, Grubhub reported $240 million in second-quarter revenues, up an incredible 51% from the same period last year. It also said a record number of new diners tried Grubhub for the first time.

As you can see in the chart below, Grubhub shares are on a tear. The stock has more than doubled over the past year, and shares just hit a fresh all-time high. It's more proof that the "smart" food-delivery trend is here to stay...