I'm sure many of you are familiar with the "desert island" game. You know... the one where someone asks things like:
"If you were stranded on a desert island and could only have one book, what book would that be?" Or maybe... "If you were stranded on a desert island and could only have one album to listen to, what would it be?"
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Of course, there are hundreds of variations involving that one thing you would want if you were stranded on a desert island. (Sunscreen.)
His answer was "railroad car loadings."
You can always count on Buffett for an interesting answer. Railroads have historically led the business cycle. When demand is picking up, factories will increase their orders, and railroads will increase their delivery of raw materials and finished goods. This should happen near the end of a recession, and the opposite should happen at the beginning of a recession.
That's the theory, and it worked very well in practice from the late 1800s until the Great Recession in 2008. The recent history is shown below.
The key to this indicator is looking for divergences between trends in rail carloads and trends in the stock market. (Currently, the level for rail freight carloads is lower than it used to be because there is less coal and paper shipped now. But even so, the indicator is still interpreted the same way.)
The chart above shows that rail carloads began rising before stocks bottomed in 2002. That was the bear market that followed the internet crash. The indicator turned down in 2007, warning of potential weakness long before the bear market began in 2008.
In 2009, the indicator and the stock market bottomed at about the same time. Now, the indicator is in a downtrend while stocks are rising, indicating that this is a time to be cautious in the stock market.
Buffett's desert island indicator demonstrates why we need to dig into our favorite tools at times. At first glance, many analysts would say rail carloads don't work anymore because the high in the recent cycle was so far below the previous highs. But by digging into the components of the index, I discovered that coal and paper shipments had declined sharply since the mid-2000s.
Less coal is being mined because of environmental regulations and increased availability of wind and solar energy. Less paper is used now because the internet has resulted in fewer newspaper and magazine subscriptions.
This is why it's important to review indicators (and why it's important to understand why an indicator works). Buffett's go-to indicator isn't broken -- we just need to make an adjustment to account for these changes.
So, what's my desert island indicator?
As my premium Income Trader readers know, it's the Income Trader Volatility (ITV) indicator.
For those who don't know, this is the indicator I developed to identify the best time to sell put options. Back in 2015, my research behind this indicator won the Charles H. Dow Award for outstanding research in technical analysis.
I've been monitoring the performance of my indicator since I first started using it, and it still works exactly as I designed it to. (I recently discussed the track record of the indicator here.) You can see the results for yourself:
My most recent recommendation to Income Trader readers is on a stock that was recently flagged by an ITV signal -- Wynn Resorts (NASDAQ: WYNN).
I've written about WYNN several times now, and, despite the recent change in leadership, its fundamentals are relatively unchanged since my last detailed review. (More on that news in a second.)
For anyone who needs it, here's a quick refresher on Wynn Resorts:
The company owns and operates Wynn Las Vegas and Encore in Las Vegas, Nevada as well as Wynn Macau and the newly opened Wynn Palace located in the Special Administrative Region of Macau in the People's Republic of China.
The company builds and operates large properties to maximize revenue and potential profits. Wynn and Encore Las Vegas offer 4,748 hotel rooms, suites and villas along with approximately 186,000 square feet of casino space, 34 food and beverage outlets, an onsite 18-hole golf course, three nightclubs, and roughly 99,000 square feet of retail space and meeting space.
What I like about the company right now is the fact that WYNN recently handled a problem in exactly the way other large companies should strive to replicate.
WYNN's problem was that its eponymous CEO, Steve Wynn, was accused of sexual harassment... and the details were as lurid as those made against Harvey Weinstein. Like the Weinstein allegation, the behavior is alleged to have continued for years. Unlike the Weinstein story, Wynn quickly stepped aside -- a move that has allowed the company to survive.
Investors' reaction to this story can be seen in the WYNN's daily price chart.
In the long run, WYNN could face some challenges, but that's exactly why I'm focusing on an extremely short-term trade -- one that will be closed less than 17 days after we buy (tomorrow, in fact).
The company's next scheduled earnings report isn't until late July, which is months after we'll be out of this trade. For our purposes, the most important detail of note is that the volatility from the news has generated an ITV "buy" signal, which is the setup for today's exciting income opportunity.
How I'm Trading This Stock -- Without Buying A Single Share
Investors interested in profiting from WYNN could simply buy the stock and hope for a short-term bump.
But my Income Trader readers and I are using a better strategy. This one allows us to collect quick income from WYNN immediately -- and be completely out of the trade in less than 17 days. Worst-case scenario: we get the chance to buy WYNN at an 8.6% discount.
Either way, we'll be celebrating tomorrow.
If you're familiar with how selling put options works, then you know how that it's the closest thing to a can't-lose situation, provided you're targeting the right stocks.
For those who want to know more about our strategy, I've released a special report that will tell you everything you need to know, including how my readers are making about $568 a week from selling options. There's even a list of three questions to ask yourself to help determine if you're ready to trade options. Simply follow this link to check it out.
This article originally appeared on StreetAuthority.com.