The Most Remarkable Trade of the Year

The Most Remarkable Trade of the Year

It’s that time of year again … time for the most remarkable trade of the year that I know of in the stock market.

I initially came across it about 15 years ago when I built SeasonalTrader, my first financial website. That was in 2001. At that time, the trade was entering its 51st year. It had been profitable 92% of the time since 1950. It had only lost money 4 times in 50 years and had not had a losing year since 1977.

This is now the 66th year of this trade … and the track record is still remarkable. The trade has now been profitable for 60 out of 66 years running – 91% of the time. The trade takes just two and a half months and has an average annual profit of 5.6%.

It’s a simple trade – buy the Dow Jones Industrial Average (DJIA) on October 26th, sell it at the close on January 10th and use a 9% hard stop loss. If the DJIA closes more than 9% below its closing price of October 26th before January 10th, 2017 then exit the trade for a loss. Otherwise, sell it on the close of January 10th.

That’s all there is to it.

Here’s a chart showing the annual profits and losses for this trade back to 1950.

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2015 was a losing year for this trade. It lost just under 7%. This trade has only ever had 2 losing years in a row once … back in 1969.

Every year I’ve been aware of this trade, it’s still been hard to pull the trigger on it. There always seems to be something to worry about come October … and this October is no exception.

The stock market has been on an uninterrupted bull run for 7 years now. Can it really continue? The VIX is at its lowest level in decades. How much more complacency can the markets take? On the day this trade started, October 26th, my friend Porter Stansberry published a terrifying and compelling piece on how the US government is digging our financial graves.

Could the US stock market really be 5% or 6% higher than it is today come January 10th? Absolutely it could … and my seasonal signal isn’t the only indicator saying so.

The DJIA triggered a new SSI Entry signal back on May 16 and it has solid, though tapering, support from its SSI Trend.

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It also sits comfortably above its large volume-at-price support just below 18,000.

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My short-term time-cycles are also supporting this seasonal trade. Here’s a look at the composite of a 52-day cycle and a 91-day cycle.

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There is always risk and uncertainty in investing and speculation. There wouldn’t be the opportunity to win if there weren’t also the possibility of losing.

Smart speculation with good risk management and consistent performance, however, has an excellent chance of success.

Have a great weekend,

Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops

Capturing Crazy Gains

Last week we talked about Going Green … i.e., buying on strength when we see the Stock State Indicator (SSI) change from red to green … and not even waiting for a pullback.

This week I’ve got some compelling examples of just how profitable “going green” can be.

It’s every investor’s dream to buy a stock at its exact low and sell it at its exact high. But that’s all it is…. a dream. It might happen once or twice in your investing career, but it will be the exception, not the rule.

The TradeStops SSI system that I developed (and continue to refine and enhance) is designed to give investors the best opportunity to:

  • Buy a stock that is in an easily-identifiable uptrend,
  • Know how much room you need to give the trend to run and;
  • Sell the stock after the uptrend has been broken.

The SSI system was designed to capture large multi-year moves higher in stocks and funds by patiently waiting for big uptrends to begin and then making sure that we can hold on until the uptrend is broken.

As we saw last week, the beginning of such uptrends is best captured when a stock or fund moves from the Red Zone of the SSI into the Green Zone.

It’s not easy for a stock to make it from the Red Zone to the Green Zone. To do so, a stock has to cross two major hurdles. First, it has to have a big bounce off of a bottom … a bounce that is greater than what you’d normally expect from a whole year of volatility for the stock. Second, it’s SSI Trend Line needs to turn decisively positive.

What we’ve found is that once these two conditions have been met, the stocks can move higher for a long time … as long as you give them enough room to run.

A classic example of the kinds of opportunities that the SSI system is targeted to capture is Northrop Grumman Corp (NOC). NOC bottomed in August of 2011 at a low of around $46 per share. By the time it triggered a new SSI Entry signal (i.e., the SSI changed from red to green) in April of 2012, it was already up nearly 20% at $55 per share.

Before I show you the chart of what has happened to NOC in the past 4 years, you have to stop for a minute and think about what you would do today if you saw a relatively conservative stock like NOC already up 20%. Many of us would say, “Well, that one got away from me already.” Right?

Wrong.

Two years after triggering its SSI Entry signal, NOC was up another 100% to $110 per share … and today NOC sits above $210 per share. That’s nearly a 300% gain after the stock had already been up 20%!

The following log-scaled chart tells the whole story.

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Another great example is Fiserv, Inc. (FISV). FISV gave a green SSI Entry signal in February, 2012 at about $33 per share. Today FISV is up almost 200% at about $100 per share.

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What’s particularly striking about FISV is that it didn’t even cross into the SSI Yellow Zone until August of 2015 – a period of nearly three and a half years!

Will these stocks eventually lose steam and stop out? Of course they will. But we don’t know when that will happen … and we don’t need to know. The SSI will tell us when the current uptrend is broken.

Capturing large multi-year trends with gains of hundreds of percent (and the benefit of long-term capital gains tax treatment) is exactly what TradeStops and the SSI was designed to do.

The best indicator I’ve ever seen for identifying the start of such trends is when the SSI changes from red to green.

To crazy gains,

Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops

Monitoring Stock State Alert Changes

TradeStops members have been responding to Dr. Smith’s editorial last week that focused on investing only in stocks that are in the green SSI Entry zone.  The most-asked question is how to find stocks that have moved from a red SSI Stop condition and triggered a new green SSI Entry signal.

For those who might have missed the article, Dr. Smith showed the results of backtesting over 1300 financial instruments including US stocks and indices, foreign stocks and indices, commodities, and funds.

He found that the best results were buying stocks right after they had moved from the red SSI Stop zone into the green SSI Entry zone.  The results for stocks moving from green to yellow and yellow to green were also good.  In each case, the average winner performed at least 5x better than the average loser.

The best way to find stocks that meet these criteria is to set up some simple Watch portfolios and have a specific focus of each portfolio.  I routinely monitor a couple hundred stocks at a time by doing this.  They’re easy to set up and once they’re set up, it doesn’t take much work to keep them updated.
Setting up a Watch portfolio is done the same way as setting up an Investment portfolio.  Go to the top of the TradeStops page and click on the “Portfolios” tab.  This will open a new window.  Click on the “Manual” tab and enter the information you’d like for this portfolio.

Educational Image 1


As many TradeStops members have seen in the past, I like having a portfolio of the Select Sector SPDR ETFs.  This allows me to get an overview of what’s happening in the different sectors.

This is what the portfolio looks like after being set up.  There are currently 10 ETFs.  XLRE has been trading for a very short period of time and does not have enough trading history to have developed a Stock State Indicator.  (XLFS will discontinue trading in the middle of November and that is why it is not included in this portfolio.)

Educational Image 2


Now, in a quick glance, I can see an overview of the different sectors that make up the stock market.

After setting up this portfolio, I am now going to set up Watch portfolios for each of these ETFs.  In the TradeStops program, you can have up to 20 portfolios and each portfolio can have an unlimited number of stocks.  For each of the ETF portfolios, I’m going enter the top 10 holdings in each ETF.  You can easily get that information from the websites of the ETF sponsors.

Here’s what the first few ETFs look like on the Portfolio page.

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Let’s click on the XLB ETF and see the Positions page.

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Six of these stocks have had green SSI signals for a while, but two of them are in the red and could be worth watching in the future if you want to buy when they turn green.  We have SSI alerts set up for all of these positions to help us know when stocks change zones from red to green to yellow and so forth.

I have Watch portfolios set up for the top stocks that make up GDX, the gold miners ETF.  This portfolio has seen a lot of action lately.

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The column that shows the number of days in the SSI State is very helpful.  Looking more closely at NEM, you can see that it just moved from the yellow zone to the green zone.

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It will take about 10-15 minutes to set up your first Watch portfolio, but as you get the hang of it, it shouldn’t take much longer than 5 minutes to set these up.  In the next few months, we will be introducing the ability to upload stocks from an Excel file into TradeStops.  This will make it even easier to set these up.  Updating the Portfolios is also simple and won’t take much time either.

And you don’t have to look at them every day.  Using the SSI alerts, you will be notified when changes in status occurs.

This is an easy way to watch scores and even hundreds of stocks according to your interests and what’s best for your investment needs.  We will continue to help our members utilize the TradeStops tools to become more successful investors.

Tom Meyer,

Member Services, TradeStops

A Sea-Change in Long-Term Yields?

Longer term interest rates have been marching steadily higher for the past several months.  Income investors are under pressure.

Is this a sea change or just a bump in the road?

It’s a supremely important question for investors.

The financial media loves to talk endlessly about the US Federal Reserve, aka the Fed, and their focus on short-term interest rates.

When will they raise rates?  How much will they raise?  Will they ultimately have to lower rates and have a negative interest rate policy similar to what’s happening in much of Europe?

I can’t blame them.

When you’ve got to sell advertising, you need something to talk about every day.  For us as investors, however, it’s longer-term interest rates that we should really be paying attention to … and longer term yields are on the move.

Look at what’s happened to the yield of the 10-year Treasury Note.  In early July, the yield was below 1.40%.  Since then, the yield has risen to almost 1.80%. That’s an increase of nearly 30%!

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The 1.40% level was last seen almost 4 years ago in the summer of 2012 and the longer-term trend is still lower, but it won’t take much to break the downtrend.  A move above 2.00% could signal a move even higher.

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What does this mean to individual investors?

For those who focus on generating income from their stock investments, this has not been a good couple of months.

Already we’ve seen interest rate sensitive groups like utilities and REITs affected by this push higher in the longer-term rates.  The utility sector, for example, pierced into the SSI Yellow Zone and almost stopped out … but it hasn’t yet.

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The chart of the REITs (real estate investment trusts) looks almost exactly the same.  It came close to touching the red SSI Stop Loss (it even did touch it intraday) before recently moving higher.

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One interest rate sensitive investment group that has not suffered the same kinds of recent declines is inflation protected Treasuries, aka TIPS.  For most bonds, rising yields mean falling prices.  Not necessarily with TIPS.

The principal in a TIPS bond increases if inflation, as tracked by the Consumer Price Index or CPI, is increasing.  You can see in the following SSI chart on TIP, the iShares ETF that tracks a basket of TIPS, how the price of TIP rose steadily through the first half of 2016 along with all longer term US Treasuries.

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What you also see in the chart above, however, is how TIP prices have NOT fallen off as longer-term yields have risen since July.  That’s because TIPS are inflation protected… and inflation has recently been on the rise per the CPI.

Let’s conclude this review of the impact of recently rising long-term yields on interest rate sensitive investments by taking a look at the big picture.

The following chart shows that yields on T-Notes have been in a 35-year downtrend since 1981.  It’s far and away the single biggest trend in investing today.

 

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When this trend finally changes … it will represent a sea-change for all investors … and for the global economy. Every investor needs to be paying attention to changes in long-term yields – whether you’re an income investor or not.

Is this sea-change upon us today? Not yet … but the winds of change are stirring.

I’ll be keeping a close eye on this developing situation and will have more to say in the coming weeks and months.

Have a great weekend,

Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops

Going Green…

No, it has nothing to do with recycling, composting or eating more vegetables.  It has to do with making more money … and the green state of my Stock State Indicator (SSI) system.

Let’s face it.  We are enamored with the idea of buying things that have fallen in price and buying at a discount.  It’s the Siren’s song of catching an investment at the perfect bottom and then watching it take right back off to the upside.

It’s a fantasy … and I’m finally throwing in the towel on this insidious idea.

There are few things that academics, value investors and technical analysts agree on.  Momentum is one of them … maybe even the only one.  Even the famous academics Fama and French have written about momentum in the stock market.

The simple idea behind momentum is that investments that are increasing in price are more likely to continue increasing in price … and investments that are decreasing in price are more likely to continue decreasing in price.

I recently came across some additional compelling evidence in support of this thesis as part of my own research.  I’ll share it with you now.

As you hopefully know by now, my SSI indicator is a three state system – Green, Red and Yellow.  Very briefly …

  • Green is the strongest state.  The investment has risen nicely off of a major bottom.  It is trending positive and is only experiencing mild corrections.
  • Yellow means that the investment has fallen in price significantly but it’s still within the boundaries of its expected volatility.  It’s getting close to being in the Red Zone but hasn’t gotten there yet.
  • Red means that the investment has corrected more than it should have corrected based on its expected volatility.  In our SSI system, the stock is “stopped out.”

If you want more depth on the three states of the SSI system, you can find it here.

In addition to paying attention to which of the three states an investment is currently in, we pay close attention when an investment changes from one state to another state.

I recently asked my research staff to study which SSI state changes presented the best buying opportunities.  We looked at three different state changes:

  • Red to Green – The investment was stopped out per the SSI and just triggered a new SSI Entry signal by rising substantially off of a bottom and establishing a brand new uptrend.
  • Green to Yellow – The investment was in the Green Zone but has corrected more than halfway towards the Red Zone.  It’s getting close to being stopped out but hasn’t been stopped out yet.
  • Yellow to Green – The investment corrected into the Yellow Zone and has just risen back out of the Yellow Zone and back into the Green Zone.  It has reasserted its upward momentum.

Using our database of several hundred securities with data back to 2000, we looked at which changes of state triggered the best buy signals.  Here’s what we found.

editorial-oct17-01 chart
Taking the “Buy on Red to Green” strategy as our example, I’ll explain the results.

There were 7,469 trades generated from the historical data.  52.7% of these trades resulted in a positive return.  The average gain of all these trades was 36.6%.  The average gain of the winning trades was 84.3%.  The average loss of the losing trades was 16.4%.  The ratio of the average gain of the winners vs. the average loss of the losers was 5.1.  Winners were 5.1 times more profitable on average than losers.

OK … I know that’s a lot of data but I want to be sure that you understand the numbers.  Now let’s talk about some of the results.

Clearly buying on the change from Red to Green leads to the biggest winning percent … by a substantial amount.  Buying on Red to Green also has the biggest average gain at 36.6% and the biggest average winner at 84.3%.

The only category in which Buy on Red to Green doesn’t win is Average Loser.  The average loss of a trade that was triggered on a change from Red to Green was 16.4%.  The other two strategies had smaller average losses.

The smallest average loss was for the Buy on Green to Yellow strategy.  That makes sense because the stocks are already getting close to the top of the Red Zone … where they will get stopped out if they close in the Red Zone.

Having that tighter stop loss point, however, meant more losers overall than winners and a smaller average gain.

Pretty interesting, isn’t it?

I’ll be writing more about this in the weeks to come.  For now, I’d say that the evidence is pretty clear that it’s time to go Green,

 

Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops

Oil…Feel the Burn

As I wrote back in August of this year, oil catches fire … and burns hot. At the time I predicted that more gains in oil were ahead. Oil is up a solid 25% since then … with more room to run.

Of course, as I’ve said many times before, being right and making money are two completely different things … and the energy markets continue to be some of the hardest markets to make money in.

For the gold investors out there, there’s an interesting inverse relationship to note between the gold markets and the energy markets. When it comes to gold, the commodity itself has low volatility (VQ = 11.6%) but the companies that do business in gold are very volatile. The VQ on GDX, for example, is 36.8%.

With oil, however, it’s exactly the opposite. The commodity itself is extremely volatile (current VQ = 30.5%) while the companies that do business in oil are lower volatility. The current VQ on XLE, the energy company ETF, is only 18.2%.

Keep that in mind as you think about how to best make money in energy.

Let’s take a look at where things stand today when it comes to oil and the companies involved in the business of oil.

As I said, oil is volatile … and we can see the impact of that volatility in the fact that oil hasn’t even triggered a new SSI Entry signal yet … in spite of being up over 60% year to date. Here’s the current SSI chart on West Texas Intermediate Crude.

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We’ve had a strong move off a bottom and the trend has started turning up but hasn’t yet built up a full head of steam. I’m expecting oil to move into SSI Green Zone any day now … but the fact that it hasn’t done so yet tells you a lot about how volatile oil really is.

When we take a step back and look at more of the history of oil prices, we can see the bigger picture … and see what price-levels have had the most volume.

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The most amount of activity (volume) in oil prices over the past 10 years has taken place around the $45 price level. That’s been the battle line for the past two years … and the action over the past couple of weeks has clearly put us on the top side of that battle line.

My time-cycles analysis also continues to be strongly bullish for oil through the first half of 2017.

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But like I said, oil is volatile … and just because all of the stars are aligned for oil to move higher, doesn’t mean that it’s easy money. Oil could easily drop 25%, scare the daylights out of everyone, and then resume its march higher … all in the normal course of business for oil.

For those lacking the stomach for that kind of volatility, the companies involved in the oil business provide a more stable opportunity.

XLE is the ETF covering the companies from the S&P 500 that are involved in the energy sector. It is a lot less volatile than oil itself (18.2% vs. 30.5%) and is highly correlated to the price oil. It triggered an SSI Entry signal back in April and has climbed steadily ever since.

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The two biggest component stocks of XLE are Exxon Mobil (XOM) and Chevron (CVX). Together they make up about 30% of the weighting of XLE. Both have strong SSI charts.

Exxon Mobile is the less volatile of the two stocks with a VQ of 15.0%. It currently has a dividend yield of 3.5%.

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Chevron is the more volatile of the two oil majors with a VQ of 19.2%. It has a current dividend yield of 4.2%.

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Bottom line … energy prices are on the rise and will likely continue to rise. There are various ways to take advantage of rising energy prices and they’re not all created equal.

Opportunities abound. The question is, which opportunities are right for you?

Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops

TradeStops Through the Rear View Mirror, Part 2

As we discussed last week, a number of TradeStops members want to integrate all of the new TradeStops features into their trading, but felt they were a little behind the curve with all of the upgrades we’ve introduced lately.

Last week, we focused on the SSI signals. This week we’re going to take a look at the Risk Rebalancer.

We introduced the Risk Rebalancer not quite a year ago. At the time, there was nothing like it available to individual investors and there still isn’t. We have a large number of TradeStops members who are professionals in the investment industry and they still don’t have anything like this available to them at their firms.

For those new to TradeStops, the Risk Rebalancer is a tool that works on a portfolio level. It looks at the stocks that you have in your portfolio(s) and equalizes the dollar risk that you take in each position. For instance, if you want to take $1000 risk in Johnson & Johnson (JNJ), you could buy $8460 of stock or 71 shares. JNJ is a low risk stock with a Volatility Quotient of only 11.73%.

But if you want to take the same $1000 risk in Agnico Eagle Mines (AEM), a gold mining stock, you could only buy $$2430 of stock or 52 shares. AEM is a high risk stock with a Volatility Quotient of 40.69%.

When we first introduced the Risk Rebalancer, it allowed you to analyze your portfolios one at a time. Here’s a screenshot of what it looked like, then.

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You would pick the portfolio you wanted to analyze, decide if you wanted to invest more cash from your account, and then click on the “Rebalance” button.

The Risk Rebalancer told you what the outcome needed to be allowing you to determine the number of shares to buy or sell for each position.

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And this was the overview of the portfolio statistics:

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This was groundbreaking information at the time it was introduced. It still is. But it feels almost quaint compared to where we are today.

The homepage of the Risk Rebalancer still has the same layout, but there are some additional choices to be made. You can still choose to rebalance a single portfolio.

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Or you can choose multiple portfolios by clicking on the “Select multiple portfolios” link at the bottom of the dropdown menu. A separate window opens up and you can see the portfolios that you choose to rebalance as a single portfolio.

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Once we click the “Rebalance” button, the output is more detailed and, at the same time, easier to understand. There are three tabs. The first one shows the changes that were made on the portfolio level.

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And further down, it shows you the percentage breakdown of your risk allocation.

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The second tab shows you the results of the rebalancing on your individual stocks.

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If you don’t want to make any changes in a specific stock, all you have to do is click on the “lock” icon to the left of the stock symbols. And if you want to exclude a position from the rebalancing, just click on the “X” icon.

You can also see the effect if you add a stock. Click on “Add another ticker” and a new window opens up. Enter the ticker symbol(s) and then the amount of additional funds you want to add, if any. After that, click on the “Save and Rebalance” button and the Risk Rebalancer will reconfigure the new portfolio.

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The third tab on the right hand side gives you detailed instructions to take if you want to execute the changes determined by the Risk Rebalancer.

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At the top of the Risk Rebalancer page is a new feature titled “Show advanced options”. Clicking on this opens up a new window that allows you to exclude all of the stocks that have red SSI Stop signals.

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Go ahead and play around with it. You can’t break the program. Our studies have shown that portfolios constructed to equalize risk are better performing than portfolios that have too much money invested in risky positions. Dr. Smith focuses on this in his investment editorials and during live presentations. Over time, you are very likely to make more money by “right-sizing” your portfolios the TradeStops way.

We are continuing to work behind the scenes to make the Risk Rebalancer an even more powerful tool. In today’s world of fintech and robo-advisors, TradeStops continues to lead the way in helping investors understand and successfully manage stock and portfolio risk for the long term.

Tom Meyer,
Member Services, TradeStops

Flash crash!

On Friday morning last week, I awoke to the following dramatic headline …

U.K. pound plunges more than 6% in mysterious flash crash

It was a good reminder of how important it is to tune-out the day to day noise of the markets … and why we focus on end-of-day closing prices and keeping our stops out of the markets.

Here’s what the chart of the British pound looks like for the past few days …

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You can see that the current VQ on the pound is only 6.8%. That means that it’s reasonable to expect the pound to move around, up or down, in a range of about 7% over the course of a year or more. Instead, investors saw a 6% correction in the pound in a matter of minutes.

Of course everyone remembers the famous flash crash of May 6, 2010 that saw nearly one trillion dollars of market capitalization disappear and reappear in the span of just thirty minutes.

Such “unexplained” events happen in the markets far too often these days … and it’s not just in the broad market indices and currencies. It happens in individual stocks as well.

Axcelis Technologies (NASDAQ: ACLS) is involved in the semiconductor manufacturing business. It’s a stock that’s been on my radar for a while because it has such a great looking SSI trend dating back several years now.

On February 8th of this year, ACLS opened at $9.64 before suddenly dropping 26% … to a low of $7.16 … and then recovering to close at $9.36. You can see the spike lower in the chart below.

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TradeStops uses end-of-day closing prices to evaluate stop losses and other alerts. You can clearly see in the chart above that ACLS dipped below its SSI Stop Loss line on an intraday basis on February 8th (and again on the 9th) but it closed above its SSI Stop Loss on both days.

ACLS went on to make new multi-year highs. Investors that had a stop-loss “in the market” on ACLS had a painful day on February 8, 2016. TradeStops subscribers tracking ACLS didn’t even know anything happened on February 8 and could still be in ACLS today with extra gains of as much as 100%.

FEEU is a leveraged ETF that focuses on the Euro Stoxx 50 Index. The ETF is fairly illiquid. But on the two days of the Brexit event, the trading volume moved to almost 5x its normal and it dropped at the open on 6/27/16.

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On June 23rd, the day of the Brexit vote, this ETF was trading at $96.52. The SSI Stop was at $71.98. On Monday the 27th, the stock dropped in the morning to $66.88, well under the SSI Stop. But it then rebounded to close at $71.98.

Today, FEEU is trading back near the $90 level.

Investors have enough to worry about without having to worry about what kind of intraday shenanigans the market makers and high frequency traders might be up to.

Keep your stops out of the market and use end-of-day closing prices as the basis for evaluating your stops. That’s what we do in TradeStops … all for your peace-of-mind,

Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops

The hurricane in the gold market

As my staff and I navigate the twists and turns of Hurricane Matthew here in Florida, it reminds me of another hurricane that’s had our attention lately – the hurricane in the gold and silver markets.

Much like Florida residents trying to anticipate the impact of Hurricane Matthew, gold and silver investors are trying to understand if the recent sharp corrections will be a passing inconvenience or the beginnings of a direct hit on their portfolios.

I favor the former … but with some caution and concerns.

Gold triggered an SSI Entry signal back in February of this year. Gold was on an absolute tear from January through June but has been making lower highs now for the past three months.

I warned last week of my short-term concerns for gold … and we did indeed finally see a breakdown in the price of gold and related assets. Gold did finally cross into the SSI Yellow Zone. It has now corrected about two-thirds of the way to its SSI Stop Loss.

The SSI chart above also shows that the SSI Trend is rolling over for gold. This is a concern. When I see an asset move into the Yellow Zone, I like to see strong support from the SSI Trend. We’ve seen more breakdown in trend than I would prefer to see.

What about the gold miners?

They have also dipped solidly into the Yellow Zone … but they have stronger support from their SSI Trend indicator.

So … what’s a gold investor to do?

Let’s dig a little deeper.

The volume-at-price (VAP) chart on GDX shows strong support at current GDX price levels. Together with the strong SSI support for GDX, I’m feeling pretty good about the likelihood of a bounce in GDX.

On the other hand, when I look at the combined picture of all of my favorite time-cycles on gold itself, I continue to be concerned.

As I’ve said many times, however, time-cycles are part art and part science. When I look at individual time-cycles, the shorter term time-cycles are very bullish while the longer term-cycles are very bearish.

In the following chart I am showing a few of my favorite individual time-cycles for gold. The longer-term 311-day cycle won’t bottom until February 2017. The shorter-term 46-day and 101-day cycles are bottoming together very soon.

Advantage short-term bounce.

Do I “know” that GLD and GDX are going to bounce from here? Absolutely not.

Am I willing to bet that we’ll see a bounce over the next few weeks? Yes.

Do I know what my risk is in making a wager on GLD or GDX today? You better believe it … and I will “right-size” my investment amounts accordingly.

Investors have a lot in common with residents in the path of a hurricane – especially in volatile sectors like precious metals and miners. We do our best to be informed. We’ll never have all the information we want. After that, it’s a matter of making smart bets.

Myself and other south Florida residents escaped the worst-case scenarios of Hurricane Matthew. Hopefully the coastal areas further north will do the same.

I hope I’ll be breathing a sigh of relief about the gold markets next week too.

Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops

Investing in biotech … the TradeStops way

It’s said that a picture is worth a thousand words. I agree … and that’s why I’m going to great lengths to paint pictures and tell the stories of real world investors and their experiences … so that we can all become better investors.

Last week I wrote to you about the unclaimed profits that investors are regularly leaving on the table when it comes to their investments. I shared specific examples from one brave soul, Mark, who was willing to take a hard look at his past performance in search of new and improved opportunities.

Let’s pick up where we left off last week and continue examining real investments by real investors and how intelligent position sizing and stop loss strategies can improve performance.

Esperion Therapeutics (ESPR) was a hot-topic biotechnology company in the summer of 2015. It had a candidate cardiovascular / cholesterol drug, ETC-1002, in testing with the FDA. The stock peaked at nearly $115 in June 2015. Then, uncertainty surrounding the FDA review brought the stock down to $80 by late June – a decline of over 30% – and created an “opportunity”.

Another of the investors in our recent study purchased $22,312 of ESPR on this “dip.” Here’s what the chart of ESPR looked like at that time:

biotech investing

ESPR immediately rocketed back to nearly $100 over the course of just two weeks for a quick paper gain of $5,500.

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Then, as is often the case, disaster struck. ESPR dropped 40% in under two weeks as the sought after FDA approval was unexpectedly delayed:

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Ouch.

I give you all of this detail because I know, if you’re like me, you can feel this investor’s pain … and dismay. What the heck just happened? I was doing so well. What do I do now? Is it going to bounce back?

This is a predicament that investors find themselves in far too often … and more often than not, become paralyzed with uncertainty. That’s certainly what happened in this case. The investor finally threw in the towel a year later when ESPR eventually bottomed out near $10 per share for a total loss of 86% or $19,208.

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Let’s take a look now at how volatility based position sizing and trailing stops could have helped with this particular investment.

This particular investor had a large portfolio of several million dollars. At the time of the original investment, ESPR had a VQ of 48.3%. That’s a very volatile stock but given the large size of the portfolio, this investor could have invested even more money in ESPR than the $22,312 he originally invested.

Given the portfolio size and the VQ of ESPR, the TradeStops position size calculator calculated an initial investment size of $43,341 – nearly double what he originally invested.

I know what you’re thinking at the moment. “Wait a minute? TradeStops suggested a larger position in this loser?”

Yes, but … it’s position sizing AND stop losses together that have the biggest impact. Let’s see how that played out with this particular investment in ESPR.

The following chart shows where the VQ based trailing stop loss system would have thrown in the towel on ESPR vs. where the investor finally threw in the towel himself.

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That was a tough stop loss to execute on … especially if you would have had to watch the stock immediately go back up $15 per share right after you “followed your discipline.”

It turned out to be the right thing to do, however. Here’s a table of how all the numbers lined up for this particular trade:

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Both outcomes produced a loss but the “sized and stopped” strategy produced a smaller overall loss, even though it started out with a larger initial position.

Losses in investing are unavoidable … but when you combine smart position sizing and smart trailing stops, your outcomes are going to be better more often than not.

Good investing,

Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops