SSI Stock Investing in the Red Zone
My mantra at TradeStops is you’ll have the best chance for success if you invest only in stocks with an upward momentum that aren’t in the SSI Red Zone. That is far and away the safest strategy to stay out of trouble for the majority of investors.
But I realize that for many investors, there are valid reasons to hold stocks in the SSI Red Zone. You might have low cost-basis stocks on which you don’t want to pay capital gains. You might have a high conviction idea that you don’t want to use a stop-loss strategy for. You might participate in an employee stock purchase plan.
There are two things that should be considered when owning stocks in the Red Zone.
The first is that even if you have stocks in the Red Zone, you want to be sure that your portfolio remains “right-sized.” This means looking at your portfolio on an annual basis and being sure that you’re taking an equal risk per position so that you have more money invested in your more conservative stocks and just the right amount of money in the riskier stocks that can blow up your portfolio.
This simple but profound position-sizing strategy more than doubled the average performance of over 40 individual investors over a 16-year period. The blue line in the chart below shows the impact of this strategy on improving the performance of this group versus the black line, which is their original collective performance.
Having an intelligent approach to position sizing is serious stuff that should never be overlooked or underestimated.
While smart position sizing is something I’ve talked about many times before, my second suggestion for what to do when you hold stocks in the Red Zone is a new one.
This year we’ve written multiple times about a sector-based strategy for beating the S&P 500 using the 9 ETFs of the Select Sector SPDR ETFs from State Street. We wrote about it here and here.
One of the most interesting parts of that research for me was the question of when to go completely to cash. In the original study, we used a rule that if 3 or more of the 9 sector ETFs were in the Red Zone, we discontinued adding any new positions and sat on the cash. Only after 7 of the ETFs were back in the Green zone or Yellow zone were new purchases made. That was a very powerful rule.
We recently expanded on that research and asked the question, “How much of a portfolio’s capital can be safely invested in stocks that are in the Red Zone?”
The answer that we came up with is 40%.
Now before I go any further, I implore you to please be careful with this idea. This is not an endorsement of putting up to 40% of your portfolio into stocks in the Red Zone. I still feel strongly that the majority of our portfolios should be in stocks that are in the Yellow Zone or the Green Zone.
What I will say today is that if you are going to be invested in stocks that have a red SSI, then make sure that no more than 40% of your portfolio’s dollar value is invested in these stocks.
Why do I say this?
The below chart takes a little time to understand but it tells the story.
What it shows is a system that is in the market when 60% or more of the portfolio’s capital is not stopped out and is out of the market when 40% or more of the portfolio is stopped out.
The bottom area of the chart shows the % of the portfolio not stopped out. The red line is the critical threshold at 60%. As long as more than 60% of the portfolios assets are in the Green Zone or Yellow Zone, it’s smooth sailing. When 40% or more of the portfolio’s assets are in the Red Zone, it’s time to step aside from some or all of these positions by either going to cash or investing in other stocks that are in the Green Zone.
So, if you’re going to hold on to some of your Red Zone stocks, you’re taking more risk, but it can work. Just make sure that:
- You’re still using smart position sizing; and
- You never have more than 40% of your portfolio in assets that are in the SSI Red Zone.
Richard Smith, PhD
CEO & Founder, TradeStops
Healthcare Stocks Point To Your Good Health!
The healthcare sector has underperformed the rest of the stock market for most of this year … and particularly for the last six months. That could be changing soon … in a big way.
The SSI chart on XLV, the ETF that tracks healthcare stocks from the S&P 500, tells the story …
XLV literally started and ended 2016 right at $70 per share. It triggered an SSI entry signal in April … right at about $70 per share. Since then, it has risen to $75 and fallen to $66 (all moves within its expected volatility range of 12.8%) and returned again … to $70.
So … why do I think all that could be about to change?
The healthcare stocks sector is trading in a very strong area of support. It went through the SSI yellow zone and came within pennies of hitting the SSI Stop signal (see SSI chart above). It has since moved higher and currently rests just inside the SSI green zone.
The volume-at-price (VAP) chart on XLV shows that XLV is sitting right on its biggest price-volume point at, you guessed it … $70.
Another striking feature of the above chart is the downward price spike that occurred in August of 2015. These kinds of sharp spikes down are very often a sign of higher prices to come because they effectively clear out all the sellers that have been hanging out at lower price levels. These kinds of events are referred to by insiders as “running the stops” or, more colorfully, “wash and rinse cycles.”
This is exactly what happened in the financial sector as well. XLF is the financial sector ETF. Like XLV, it also spiked lower in August of 2015 and, about a year later, moved sharply higher off of strong VAP support.
This same kind of opportunity may be setting up in the healthcare sector right now. The sellers in the healthcare sector have been exhausted. Support has held. The sector is poised for a breakout to the upside … and that upside could be very potent.
Finally, my time-cycles are forecasting a move higher in the healthcare sector for the next four months as well.
The healthcare sector is normally thought of as a defensive sector with the ability to outperform a market that is moving lower. If the markets take a breather, as I suggested last week, the healthcare sector could buck the trend.
To your good health!
Richard Smith, PhD
CEO & Founder, TradeStops
Our Most Important Research
Back in June, we published one of our most important pieces of research of 2016 … how to crush the S&P 500 using just the S&P 500 … plus the TradeStops SSI system. The simple system we published back then beat the S&P 500 by 2 to 1 … and did so with less than half the risk!
I recently asked my team to apply our more recent groundbreaking research to that study to see the impact. I wasn’t disappointed. Trust me, you’re really going to want to see this.
The original study had been prompted by a challenge from one of our subscribers who wanted to know how our Stock State Indicator (SSI) system performed on the S&P 500 vs. a simple buy and hold strategy.
Here is the main stock market indicator takeaway chart.
The SSI system includes an exit and an entry strategy, both based on the TradeStops Volatility Quotient (VQ). The system represented by the blue line above used the SSI system to strategically exit (red down arrows) and re-enter the S&P 500 (green up arrows).
The outperformance of the SSI system here comes entirely from being out of the market during the 2001 – 2003 and 2008 – 2009 periods. The system was also out of the market for a few months in 2015 – 2016 but it lost a little ground by being out of the market during this period.
OK. That’s the backstory. Now … there are two pieces of our most recent research that I asked my team to apply to the original study. The first one is the research we did on how increases in volatility (rising VQ’s) can be used as an additional buy indicator.
In the chart below we can see how in both 2003 and 2009 the VQ on the S&P 500 did indeed increase nearly 100% or more above its long-term average of 10%.
We can also see how the VQ had not substantially increased in 2015 when the SSI gave a signal to exit. Could that lack of significant rising volatility in 2015 have been an indication to stay in the market instead of exit? Possibly … but that research question will have to wait for another day.
I do want to point out that applying the research above to our SPX + SSI system did not have any impact on the results that the system produced. At this point, it is just interesting to see how significant increases in VQ often precede long-term rallies. The final application of this research still remains to be uncovered.
On the other hand, the second piece of research I asked my team to apply had a decisive impact on the results. The research in question is our study on when to add to a winning position.
I don’t have time to review that research in detail here. You can review the article at the link above if you want the nitty gritty (and it admittedly does take a little work to understand). The upshot is to add to a winning position after every 2 VQ’s of gains.
The chart below shows how that looks on the S&P 500. The green arrows are the initial SSI entry points and the blue arrows are points at which we added additional legs to the winning positions.
How did this stock market indicator strategy of adding to our winners perform? It added another 100% of gains beyond the original 100% improvement of just the SSI itself.
Pretty remarkable, isn’t it?
What really excites me about this, besides the obvious profit potential, is that it all perfectly captures my fundamental behavioral insights on investing.
- We have a bias towards our losers that is hard to see at first and even harder to overcome. We have to learn to cut our losses … and stay in our winners. Even the simplest of trailing stop strategies can help us accomplish this. Our volatility-based trailing stop strategies do it better than anything else I have seen.
- The stock market has momentum. What goes down often keeps going down and what goes up often keeps going up. It’s not true all the time but it is true more often than not. It’s better to add to winners than it is to add to losers.
- It’s best to decide how much to invest based on how much we’re willing to lose if we’re wrong rather than on how we feel about the investment.
- The stock market can stay irrational longer than we ever expect. It’s better to limit the role that our thoughts and feelings have upon our decision making. (Note that I said “limit” rather than “eliminate.”)
That’s all folks. 15 years of research and 200% alpha … all grounded in fundamental truths of behavioral finance that you can take to the bank.
Happy New Year!
Richard Smith, PhD
CEO & Founder, TradeStops
Alarming Signs of a Current S&P 500 Top
I have repeatedly gone against the grain this year and called for higher US stock market prices when everyone else was calling for the sky to fall. Today, I’m seeing alarming signs of a possible current S&P 500 top.
As for our bullish calls this year, let me briefly revisit them. There was:
- The SSI entry signal on the S&P 500 back in April.
- The post-Brexit rally / Ameribuy call in July.
- The most remarkable trade of the year call in October.
- The Trump rally call in November.
All throughout the year, I cautioned readers against buying too much into the “sky is falling” narrative. So why am I warning of a possible top today? Let’s take a look.
My biggest concern about the ability of the current rally to continue comes from my time-cycles analysis. All year long the time-cycles have been very accurate … and they’re currently signaling a top in January.
As I’ve said many times before, I use time-cycles to know which way the wind is blowing. Just because the winds might be blowing south, doesn’t mean by itself that the stock market can’t keep heading north. There are other reasons, however, to be cautious.
Our “smart-money” sentiment indicator, the commercials commitment of traders report, is also signaling headwinds ahead for the stock market. The smart-money market players have been hedging their bets on this rally most of this year … and they continue to do so today.
Commercial hedgers can be wrong for months at a time (they have a lot more staying power than most of the rest of us) but eventually they tend to be proven right (and collect their winnings accordingly).
Finally, our volume-at-price analysis shows that the S&P 500 has built up a significant amount of overhead volume here at the 2,250 – 2,275 level. It’s not an overwhelming resistance but it is enough to require some extra oomph to break above these levels and I just don’t see where that extra energy is likely to come from.
Let me end by reminding us all that “staying in your winners” is one of the cardinal rules of the TradeStops system. The SSI indicator on the S&P 500 is still solidly in the green zone … and that isn’t to be taken lightly.
But it is most certainly a time to be cautious … and not overreach for more stock market gains. The S&P 500 is up nearly 10% since Trump’s election victory. No one really knows what a Trump presidency is going to look like. I’m not even sure the Donald himself knows.
At a minimum, there is bound to be some turbulence along the way … and my indicators are suggesting that it is probably time to turn on the “fasten your seatbelts” sign.
As my colleague Tom Meyer suggested earlier this week, it’s a good time to make sure your portfolio is ready to weather any storm.
It’s been a great year here at TradeStops. I’m very proud of what we’ve accomplished and very appreciative of your confidence and your business.
I wish you all a happy and prosperous 2017,
Richard Smith, PhD
CEO & Founder, TradeStops
How to Invest Like a Pro in 2017
With only a few trading days left in 2016, many investors are making their resolutions for 2017.
“Next year I’ll follow the trading signals.” “In 2017, I’ll get rid of the stocks that are hurting my portfolios.” “I’ll set up my portfolios for the best return possible really soon.” And the big one, “Next year I’ll stop being so emotional with my stock picks.”
Why wait? There’s no better time than the present to look at your portfolio in the same way that a professional would and figure out how to invest like a pro in 2017!
Have any losses from 2016? Then consider “harvesting” those losses. Tax-loss harvesting means selling the stocks that are losing money. You can use these losses to offset the capital gains you’ve made in other stocks throughout the year. If your losses are more than your gains, you could potentially carry forward these losses into 2017 and beyond.
After a pro has finished harvesting his losses, the next thing he does is take a look at his portfolios and determine if he is invested too heavily in one or two sectors. The TradeStops Asset Allocation tool can help you with that. It gives you a quick overview as to how you’re invested from a sector or industry perspective.
This sample portfolio has over 34% invested in the consumer discretionary sector. Having that much money in a single sector could mean that it’s overweighted in your portfolio.
The next thing that a professional would do is to see if there are any potential “time bombs” in his portfolio. These are stocks that could damage a portfolio by pulling down overall returns. These stocks should be considered for removal from the portfolio.
TradeStops Premium makes this task simple. Just go to the Risk Rebalancer and have all of the stocks that are in the SSI Red Zone removed from the portfolio. The Rebalancer will reallocate the funds from these potentially destructive stocks into those that are better-positioned to move higher.
Here’s a sample portfolio that has 11 positions, and 3 of those are in the SSI Red Zone.
We can remove the stocks that are in the Red and reallocate the funds into the stronger stocks.
And we’ll take the exact same dollar risk per position. This is how a pro is able to stay in trades for a longer period of time and maximize the potential gains.
This is what the same portfolio looks like after removing the red and right-sizing the remaining positions.
In this example, there is $1422 of risk in each stock. That means you can own 321 shares of GE but only 34 shares of NFLX.
If the only thing you did this year was to rebalance your portfolio so that you’re right-sizing your positions and taking the same amount of dollar risk in every trade, the long-term results could be outstanding.
Here’s an example of one investor who went from a loss of $100,000 to a gain of almost $60,000 just by right-sizing his portfolio.
I’ve heard predictions for 2017 that run the gamut from new all-time highs at the end of the year to portfolio-crushing bear markets. I don’t know if either of these will be correct or if somewhere in the middle is the more likely outcome.
I do know that by managing your portfolio like a pro using the TradeStops tools, you’ll give yourself the biggest opportunity to succeed profitably in the years to come.
Here’s to profitable New Year’s resolutions,
Education Director, TradeStops
When will the pain end for gold investors?
Since the US presidential election, the US dollar has headed straight up … and gold has headed straight down. When will the pain for gold investors finally end? I think sooner rather than later, though a lot depends on the fate of the US dollar.
Since late spring / early summer, when the US presidential campaign really began heating up, the negative correlation between gold and the USD has been startling. In fact, the negative correlation dates all the way back to mid-2015.
A year ago, gold was at its lowest point of the year, trading in the $1060 range. It moved higher in the first half of the year and topped at the $1360 level in the first week of July.
On the other hand, the US Dollar was trading near a high one year ago and moved down to the 93 level at the end of June. Since then, it has been steadily moving higher, culminated by the spike after the Trump election in November.
The SSI chart for both gold and the USD tell the same story as well.
Gold had a great run for the first half of 2016, but, as we feared, has been suffering since July.
The USD, as we predicted, bottomed over the summer and has been on an absolute tear this fall. It triggered an SSI entry signal in November right after Trump’s election.
The volume-at-price (VAP) charts that we like to look at for support and resistance don’t offer much encouragement either, I’m afraid.
Gold moved lower underneath an area of support in the $1150 range and now looks to have a downward momentum to the $1070 level.
On the other hand, the dollar is in no-man’s land after its spectacular rise. There is no resistance in place at this time to stop its move higher.
That’s the bad news for gold investors looking for some dollar downside and gold upside. Looking out a bit further into the future, however, it’s not all doom and gloom. In fact, there are some reasons to be seriously optimistic.
The commercial traders of the dollar seem to be locking in prices as the Commitment of Traders report shows bearish holdings by the hedgers on increasing open interest.
Look at what happened in late 2014 and early 2015 as the traders held large bearish positions at the same time that open interest was increasing. This pattern seems to be repeating now.
My time-cycles forecast for the dollar remains bullish, into the early part of 2017 but strongly suggests that we should see a top in the dollar rally in the next 30 to 45 days.
As for gold itself, I’m waiting for the commercials to build a bigger position before I get super-bullish but the long-term cycle in gold is definitely heading up, and commercial players have begun accumulating a new position.
When gold does bottom and finally start its long awaited ascent, …I think that it’s going to be huge.
May your holidays be merry and bright!
Richard Smith, PhD
CEO & Founder, TradeStops
How to make a killing in pizza
I was in college in the late 80’s when Domino’s Pizza was the fastest growing franchise business in the country because of their promise to deliver a pizza to your door in 30 minutes or less.
It was clearly a quantity over quality play … and the lack of quality caught up with them. For me, Domino’s was what you ordered when there wasn’t anything else available.
That’s why I was astonished when I asked my team to find a great example of a stock that captured some of the highlights of our research this year … and they came back to me with DPZ – Domino’s Pizza.
Unbelievably, DPZ went from a low of $3.86 per share back in late 2008 to a recent high of $169.24 per share. That’s a gain of over 4,200% … a 42-bagger. Here’s the latest SSI chart on DPZ. (Note that the chart uses a log-scaled vertical axis … each vertical gridline is a 100% gain.)
Those are the kinds of profits that all of us need to experience at least a couple of times in our lives as investors … and they are exactly the kinds of profits that the tools of TradeStops are designed to capture.
TradeStops triggered an SSI entry signal on DPZ way back in January 2010 at just under $10 per share … and it hasn’t been stopped out since.
I love seeing these kinds of charts because I know that had I been faced with an SSI entry signal at $9.85 per share on a stock that had been trading at $3.86 per share just a year ago, it would have been hard to pull the trigger.
Who wants to buy a stock that is already up nearly 200%? Today I can happily say, “I do!”
Clearly, DPZ is a great example of the research we’ve been sharing this year on the power of Going Green. Had you bought when the SSI on DPZ first turned green back in early 2010, you’d be sitting on gains of over 1,500% today. That’s the kind of green that anyone can love.
DPZ also beautifully demonstrated how a buildup in volatility “energy” can be a trigger of multi-year gains. Over the past 20 years, the average VQ on DPZ has been 25%. That’s reasonable volatility.
From 2007 to 2010, the VQ doubled from a low of 20% to over 40%. For the past 6 years, DPZ has been feeding off that peak in volatility to fuel its multi-year profitable trend.
The final piece of our 2016 research that is illustrated by our DPZ example is the concept of adding to a winner. We introduced this idea in our November piece on Doubling Up … On your Winners.
It’s a very common practice to “double down” on investments that have fallen in price. It’s almost unheard of to “double up” on winning investments. Our research showed that this can be a very powerful strategy.
Had we followed our “add to a winner every 2 VQ’s” on Domino’s, we would have added another leg to our position at each of the blue arrows here.
The chart below shows the extra profits that this “adding to winners” strategy could have generated in DPZ. All of the “buys” used in this study are based on a risk of $250.
The black line is the profit generated from buying once at the initial SSI entry signal. Risking $250 back in 2010 generated profits of about $9,000.
The blue line is the profit generated by adding to a winner and risking an additional $250 every time DPZ made another 2 VQ’s of gain.
These types of gains don’t happen often. I’ve said a number of times that to be a successful investor, you must know how to “unlimit” your gains. In other words, let your winners run for as long as they will keep moving higher … and consider adding to your winners along the way.
Domino’s may be known for delivering pizzas, but TradeStops is known for delivering profits.
To tasty investments,
Richard Smith, PhD
CEO & Founder, TradeStops
Lock in higher yields while you still can
While investors and the media focus on the stock market, the real action continues to take place in the bond market. The bond market warnings we wrote about in October and again in November did indeed crash onshore in the past couple of weeks.
While I’m obviously not surprised by the spike in long-term yields, I think that the corrections we’ve seen in the bond markets are overdone … and that this is likely a good time to consider locking in some of the higher yields we’re seeing today.
Before I get to why I believe that the bond market rout is overdone, let me remind you that what I write here on Fridays may or may not be in lock-step with current TradeStops signals.
TradeStops algorithms do a great job of covering 95% of our decision making needs and keeping us out of trouble, but once in a while, we see things that look likely to preempt our algorithms. A good example is our call this year on a rising US Dollar. We started calling for a stronger US dollar way back in May, long before a new SSI entry signal was eventually triggered on November 17th.
We think that we may now be seeing a similar situation developing with US Treasuries.
It’s a pretty daring call because the SSI chart on 10 year Treasuries looks absolutely terrible. The SSI is solidly in the red after having been stopped out over a month ago, and there is no sign of a bottom in sight.
So why on earth would I suggest this might be a good time to lock in some higher yields?
Just looking at the one-year chart above, it would be very easy to be negative about the downward direction of Treasuries (and upward pressure on yields), but let’s take a “bigger picture” view.
Back in 2013, the 10-year Treasury Note had a similarly steep drop from a higher level. We have now dropped back down to the highest level from 2013. There is strong support at the 120 level which is just a few points lower from where we closed yesterday.
And the commercial traders are as bullish as they’ve ever been. The most recent COT (Commitment of Traders) report shows that the traders have nearly their largest long position on record. Open interest on the futures contract is also near an all-time high. Higher open interest means that more capital is flowing into this market.
The red, oval highlights in the chart above show how in the past this level of bullishness has preceded higher moves in the Treasury markets.
The time-cycle forecasts have been doing a great job of forecasting T-Note prices. Right now, the time-cycles analysis very strongly suggests a bottom is near. We should start seeing higher prices by the beginning of 2017.
I’ve highlighted the long-term trend line in Treasury yields recently. The downtrend has definitely been broken, though we’ve seen this kind of brief breach of the downtrend a few times before. We will need to see something more decisive before we start quaking in our boots.
While the broken trend line is something to keep a close eye on, there’s another perspective on this trend that I haven’t shared before … the logarithmic trend.
When looking at very long-term trends, it’s useful to use a logarithmically scaled chart. On a log-scaled chart, equal vertical distances represent equal percentage changes. Bear with me for a minute while I briefly explain this concept.
If you look on the chart above, a move from 9% down to 8% is a 1% drop, but it’s also 11.1% of the distance from 9% down to 0% (i.e., 1% divided by 9%). Right?
On the other hand, a move down from 3% to 2% is also a 1% move, but it’s 33% of the distance from 3% to 0%.
Alright, if you’re eyes aren’t too glazed over from the math, now take a look at the log-scaled version of this same data below. You can see how the distance of 9% down to 6% is about the same vertical distance from 3% down to 2%. Both represent 33% falls.
OK … math lesson over. Now let’s talk about what this means.
When we look at the long-term trend of T-Note yields from this log-scale perspective, it shows something very interesting. It would take T-Note yields north of 4% to decisively break this long-term downtrend.
That’s a LONG way from where we stand today. Even Janet Yellen’s three planned hikes next year won’t add 1.5% to long-term yields.
We’re still largely in a zero interest rate world … and some of the safest investments on earth, US Treasury Notes, are now yielding 2.5%. How long do you think that is going to last?
Commercial interests (aka smart money) are buying … and the time-cycles are bottoming.
These conditions could be the Christmas present that income investors have been looking for.
Have a great weekend,
Richard Smith, PhD
CEO & Founder, TradeStops
Groundbreaking original research
Part of the value of subscribing to TradeStops, or even just reading our editorials, is following our groundbreaking original research. We’re always looking for ways to help individual investors make more and risk less.
If I say so myself, this year we delivered in spades.
Today I’m going to briefly review some of the highlights of our research from the past year … and share with you a stock that passed all the screens.
The first theme we covered extensively this year is the power of buying a stock when it triggers a new SSI Entry signal and is in the SSI Green Zone.
In June, I showed you how to crush the S&P 500 by using only the SPY ETF. This article showed you that by following the SSI signals and only being long SPY when it was trading in the SSI Green Zone, you could have tripled the performance of the S&P 500.
In August, I took you into my research lab and showed you how you could make 37% per trade over a 20-year time frame using the SSI signals. This included almost 7500 trades in 1300 different tickers. The bottom line is that the SSI signals on winning trades outperform the losing trades by 5-1.
In October, we looked at how stocks that have given an SSI Entry signal could capture crazy gains before touching the SSI Yellow Zone. This research changed my own personal trading. I don’t wait for pullbacks as much for stocks that are in the SSI Green Zone.
Fiserv (FISV) was a good example of a stock that was in the Green Zone for almost two years before it touched the Yellow Zone.
And in November we asked, “When is too late to buy?” We found that even if you missed the SSI Entry signal, you could still buy the stock up to 2 VQs higher from the original SSI Entry signal.
Berkshire Hathaway Inc. (BRK.B) was a perfect example of this.
Finally, over the past few weeks we’ve looked at how expanding volatility (i.e., increasing VQ) can be the fuel a stock needs to kick-off a multi-year uptrend. I called this stock picking on steroids.
The S&P 500 was an excellent example of this going back 45 years.
So today I’m going to show you a stock that fits into all of these categories.
SSI Green Zone? Check. It triggered a new SSI Entry signal in the middle of April.
Sector moving higher? Check. This stock is part of the energy sector that has been in the Green Zone since the end of April.
Still within 2 VQ%? Check. The stock is trading at about $19, and the 2 VQ% level is at $23.
History of VQ% moving higher and the stock moving higher when the VQ% comes down? Check.
Here’s the chart of our mystery stock for the past 30 years. You can see that at almost all times when the VQ% peaked higher than the 30% level and then began to move lower, the stock had multi-year moves higher.
What’s the name of our mystery stock? Marathon Oil (MRO).
TradeStops isn’t in the business of giving securities advice … and this is not a stock pick. You have to decide for yourself what factors to consider before purchasing any new stock. However, it is an intriguing opportunity for your additional consideration that meets all the criteria of our 2016 research.
Consider it an early stocking stuffer.
Richard M. Smith, PhD
CEO & Founder, TradeStops
Brazil … junk or jewel?
Brazil has taken a beating over the past couple of years. EWZ, the popular ETF that tracks the performance of large-cap and mid-cap Brazilian equities, peaked at over $75 back in 2008 before falling nearly 75% over the next 7 years.
The negative headlines out of Brazil have been relentless and devastating.
Brazil’s Crash Landing: Corruption Engulfs Petrobras Amid Economic Contraction and Rising Inflation
Brazil’s Economy Faces Trouble
President Rousseff Impeached and Removed from Office
Brazil Government Won’t Let Rio Go Broke as Bailout Seems Likely
Fitch Downgrades Rio Debt to Super Duper Junk
Brazil Struggling to Compete Thanks to Government, Corruption
Brazil’s Telfonica Tumbles: CEO Leaving and Downgrade
As Crime Wave Hits Brazil, Daily Death Toll Tops Syria
I’ve seen all of these headlines and more over the past two years. I knew that EWZ had dropped by more than half as oil prices plunged for the past two years. I knew that the political situation was unstable at best. I heard reports that suggested the Olympics were a disaster financially for Brazil.
So, as I was flipping through research charts this week, I wasn’t prepared to see this …
EWZ actually triggered an SSI entry signal way back in March of this year … a full month before the S&P 500 triggered its own SSI Entry signal. It has been up as much as 100% this year since bouncing off a strong bottom in January 2016.
The strongest time-cycle for EWZ, the 213-day cycle, is also bullish for the next six months (after absolutely nailing the January 2016 lows).
Finally, my latest research. on when rising volatility can be used as an additional buy indicator also flagged EWZ as an interesting opportunity. The 15-year chart of EWZ below includes a historical view of our Volatility Quotient (VQ) indicator in blue at the bottom of the chart. It shows how peaks in historical VQ have coincided with strong up moves in EWZ over the years.
Many investors would think that since EWZ is already up nearly 100% in 2016 that it’s too late to get on board. I used to think that way too … but I don’t anymore.
EWZ looks to me like it has room to run. It’s been in a stealth bull market for the past 9 months while the headlines bled red. I suspect that in another 9 months the headlines out of Brazil will be gushing with praise for their “surprising” recovery.
That’s when it will very likely be too late to profitably invest in Brazil.
Richard M. Smith, PhD
CEO & Founder, TradeStops