A mini-panic in gold

A mini-panic settled in on the precious metals markets this week. The Wall Street Journal even ran a headline “Gold Hits Fresh One-Month Low Ahead of Fed Gathering.” A couple of gold bulls I follow had to yell “Stay the course” to their readers.

It’s all pretty humorous actually. Let’s look at the facts.

Gold’s “one-month low” was a drop of just 3.2% from its early July high. The current VQ on gold is 12.8%. Gold has corrected about a quarter of the way to its SSI stop loss. Here’s the latest SSI chart on gold.


It’s comical that national headlines can be written about such trivial events. I hope you see it that way too.

The corrections in silver and in the mining companies were a bit more severe … but not when you look at them in the context of what kind of volatility you should expect for these assets.

Silver is down about 10% from its peak. That’s about half of its 19.3% VQ. Silver’s correction was the most dramatic but it’s not even to its SSI Low Risk Zone yet.


GDX, the ETF that tracks the performance of the larger precious metal miners, was off 14% from its recent high. The VQ on GDX is currently 36.6%. GDX is only about a third of the way to its SSI Stop Loss which currently sits at $19.87.


As I wrote last week, I am expecting a correction in gold and its related assets. It’s possible that this week was the start of that correction, but that remains to be seen. What we’ve seen so far can hardly even be called a correction. The fact that panicky headlines are being written about this minor of an event bodes well for the eventual continued upside.

Have a great weekend,

Richard M. Smith, PhD
CEO & Founder, TradeStops

Triple the S&P with just 9 ETFs

Last week I shared with you how the TradeStops SSI strategy generated an impressive average gain of 37% across a deep data set of 1,300 securities back-tested over a 20-year period. This week I’m going to show you how you could use a similar strategy to beat the market on a much smaller set of ticker symbols.

A number of users wrote in after last week’s essay, saying that the study looked great but that it wasn’t exactly something that they could “try at home.” Point taken.

Last week’s study wasn’t meant to be a strategy for individual investors to follow. It was meant as a robust test of the SSI strategy over a diverse set of equities and a long period of time. The SSI strategy passed with flying colors.

This week I asked my research team to test the same kind of SSI-based strategy across the 9 Select Sector SPDR ETFs. These 9 ETFs break up the stocks of the S&P 500 into 9 sector-based groups:

  • Consumer Discretionary (XLY)
  • Consumer Staples (XLP)
  • Energy (XLE)
  • Financials (XLF)
  • Health Care (XLV)
  • Industrials (XLI)
  • Materials (XLB)
  • Technology (XLK)
  • Utilities (XLU)

We came up with two different strategies for your consideration using just these 9 ETFs. Both had very good performance.

The first strategy we tested was extremely simple. Here are the rules:

  1. Be fully invested at all times in whatever Sector SPDR’s have an active SSI (i.e., the SSI is not in the red zone).
  2. Rebalance (with the TradeStops Risk Rebalancer) on the first trading day of each month.
  3. If an SSI stop loss is hit on a position mid-month then exit the position and keep that portion of the portfolio in cash until the next monthly rebalancing.


Beginning in the year 2000, the strategy handily outperformed the S&P 500. The S&P 500 is up 47% in that time, with 2 periods of steep decline. The Sector ETF strategy is up 90% over the same period of time.

That’s nearly double the original performance … and it came with less risk. There was only one time that the strategy suffered a serious decline and even then, the loss was less than that of the S&P 500.

There’s another strategy that my research team discovered that even outperformed this first strategy. This second strategy tripled the return of the S&P 500. I’ll show you the chart first this time.


This system resulted in 72.62% winning trades. And the maximum system drawdown was only -17.96%.

The unique twist to this particular strategy is that it requires that 7 out of the 9 Select Sector SPDR ETFs have active SSI signals in order for the system to be fully invested. Here’s how it works:

  1. To initiate trading, 7 of the 9 ETFs have to have an active SSI Entry signal. You’ll notice that the first entry into the markets was not until late 2003.
  2. If any position hits the SSI Stop, exit that position immediately.
  3. Rebalance on a monthly basis (first trading day of the month) if and only if there are 7 or more ETFs with active SSI signals and one or more SSI signals occurred during the month (an active stock was stopped out or an inactive stock triggered a new entry signal).
  4. Rebalance annually if no rebalancing events occur over a 12-month period.

Doable. Right?

I’m pretty darn intrigued by these results. I hope you are too,

Richard M. Smith, PhD
CEO & Founder, TradeStops

Making money in gold

The last time I wrote about my technical concerns with gold, the main feedback I got was, “You’re wrong! This time it really is different.”

Everyone seems to think that gold is on a one-way moonshot ride to somewhere in the $3,000 to $10,000 per ounce range.

That’s a very dangerous idea … and not because I don’t agree with it.

One of my favorite investment books is “Being Right or Making Money” by Ned Davis. (A third edition of this book was recently published in October 2014.) We can be right about our ultimate destination … and still lose plenty of money along the way.

If you’re a raging bull on gold, please take today’s observations as an opportunity to manage your expectations about what gold might do in the short-term. If you’re a speculator looking for a compelling short-term profit opportunity, I think that gold is setting up for a short-term correction.

First, a quick update on the SSI chart for gold (via GLD, the gold ETF):


Needless to say, gold has had an amazing 2016. The SSI Trend is as strong as it has ever been. Gold hasn’t even corrected into the Low Risk Zone and it sits near a three year high.

The current VQ on GLD is 12.9%. From the recent high of $130.52 that puts the top of the Low Risk Zone at $120.41 and the SSI Stop Loss at $113.68. I am not expecting to see GLD hit its stop loss but I do believe that we could see gold fall 8% to 10% in short order. Keep in mind that this would just be the normal course of business for a gold rally.

The reasons for my skepticism about the ability of this gold rally to continue on without a breather should be familiar to you by now.

There is big overhead resistance around $130 on GLD per the volume-at-price (VAP) chart we’ve been following all year.


The futures markets are showing historic levels of sentiment extremes, as I pointed out a few weeks ago.


And my latest time-cycles analysis shows a pending short-term top for cash gold prices.


On the bullish side of the ledger, gold does tend to be seasonally strong through late September / early October. It could well be that the seasonal winds keep gold from a substantial correction for the next 4 to 6 weeks. If we don’t get the expected correction in the next few weeks then I would definitely expect it in October or November.

Gold is doing great and I expect more greatness in the months and years to come. It won’t likely, however, be a straight moonshot to the top … and it’s important that we continue to monitor the situation and monitor our expectations.

To being right AND making money,

Richard M. Smith, PhD
CEO & Founder, TradeStops

37% per trade … over 20 years

As you know by now, I love back-testing my systems. In the past couple of months we’ve back-tested our Stock State Indicator (SSI) system against the S&P 500 as well as developed multiple strategies for outsmarting the DJIA using the SSI.

Today I’ve got a new batch of results to share with you … the most impressive I’ve seen yet.

I keep a custom list of over 1,300 different equities, indices and commodities. I update it every week as part of my market analysis.

We recently completed a study of how our SSI system performed on this database of 1,300 assets. Using our SSI system, we generated nearly 7,500 trades over the 20-year period from 1996 to today. The numbers are pretty impressive.

Here is the table of results:


Over the 20 year period we identified 7,469 individual trades that were generated by the SSI system (SSI entry followed by SSI exit). Of those 7,469 trades, 3,935 of them were winners (52.7%). That’s just better than 50% of the trades.

Barely better than 50% winners might not sound that exciting … but it is when your average winner is 5 times bigger than your average loser! That’s the case here where the average winning trade was +84.3% and the average losing trade was -16.4%. That’s a 5 to 1 win / loss ratio. That’s huge.

Overall, the average gain across all 7,469 trades was 36.6% and the average trade was 495 days … or about 16 months. This number is important actually. It tells me that this system is generating trades that last about a year and a half. That’s a sweet spot for individual investors. We want to hold our investments longer than the average investor does.

Let me share with you one example from our database – Apple, Inc. (AAPL). Here’s the chart showing the SSI based trades on Apple back to 1996:


There have been 8 SSI entry signals in AAPL since 1996 (the last trade is still open). The first SSI entry signal was in March of 1998. Here is the table of all the trades in AAPL:


The average gain in the 7 closed trades was 138.2% and the average holding period was just over 21 months. Sweet!

These kinds of results are very exciting to me. They are further confirmation that the Stock State Indicator system is a solid system for individual investors looking to hold investments for at least 12 to 18 months or more … and to make sure that their winners are bigger than their losers.

Make more. Risk less,

Richard M. Smith, PhD
CEO & Founder, TradeStops

Equalizing Risk in TradeStops

The mantra of Dr. Richard Smith and the TradeStops team is “Make More. Risk Less”. All of the tools in TradeStops were developed with this one goal in mind.

The Risk Rebalancer is a powerful ally to help you make more and risk less.

This tool allows you to bring in a portfolio of stocks and then automatically equalize the dollar risk in each position.

Our research conclusively demonstrates that equalizing dollar risk, as opposed to investing the same dollar amount in each stock, is the best way to invest money for the long run.

Here’s an example. The usual way of investing calls for you to invest the same amount of money in each stock. So, for this example, let’s look at what happens if we invest $5000 into an oil stock and a gold miner stock. We’ll use XOM and ABX for this.

To find the amount of risk we’re taking in each position, go to the “Research” tab at the top of the TradeStops site and then click on the “Magic Calculator”.

Here’s a $5000 investment in XOM.


As you can see, a $5000 investment in XOM has a normal risk of $745.44. That is based on the relatively low volatility of XOM as measured by the TradeStops’ Volatility Quotient.

Now, here’s the same $5000 investment in ABX.


The normal risk in ABX is $1974.25 – more than double that of XOM! This is because the VQ% is over 39%.

If you were to invest $10,000 into these two stocks the way that most on Wall Street suggest, it would look like this. And we are taking more than $2700 in risk if we invest this way.


Using the Risk Rebalancer to equalize the actual dollar risk in these two stocks, the outcome is noticeably different.


The portfolio now has about $7200 invested in XOM, the stock with the lower volatility. And only about $2700 is invested in ABX, the stock with the higher volatility. The risk per position is now only $1085.

By using equalized dollar risk, we have dropped the amount of risk we’re taking from $2725 to only $2170. This is a difference of $555….in your favor!

Now, let’s go one step further. We know that we’re taking $1085 risk in each of these two positions. Let’s add another stock to the mix.

AAPL just gave us a new SSI Entry signal. We want to add $1085 of risk into this position as well. How many shares can we buy and how much will that cost?

Easy, just go to the “Position Size Calculator” that’s next to the “Magic Calculator” and plug in the numbers.


And after pressing the “Calculate” button, here are the results.


In order to have equalized dollar risk in AAPL, we can buy 53 shares.

It’s that easy. Being a successful investor is not about making a killing on one or two trades. As Dr. Smith says, a successful investor is about staying in the game for the long run.

Equalizing the dollar risk per position is the best way to stay in the game for the long run.

Tom Meyer, Services, Membership

A Big Move Is Setting Up In Oil

In my personal experience as an investor and trader, there has been one market that nearly always beat me to a pulp … oil. It always went higher than I ever expected it to when I was short and lower than I ever expected it to when I was long.

Now I know why … thanks to the VQ.

Oil is volatile … very volatile. In fact, it is one of the most volatile commodities in existence. Oil is 140% more volatile than gold. It’s even 40% more volatile than silver. It’s 85% more volatile than corn. It’s 100% more volatile than cotton.

Right now the current Volatility Quotient (VQ) on West Texas Intermediate Crude is 29.5%. That’s more volatile than Baidu (BIDU). This year alone, oil was down 29% in six weeks, up 95% in four months and now down 23% in the past seven weeks.

Oil catches fire … and burns hot.

I’m not sure why I didn’t think that oil should be that volatile. It’s probably because the market for oil is so massive that it just seemed to me that something so large couldn’t be so volatile. Not true.

All of this is a prelude to what I want to share with you today … my thoughts on where oil is likely headed this year. I believe that there is a big opportunity setting up to buy oil. But I also know, from past experience, that it will be very hard to make money off of it, even if I’m right.

Let’s begin with a look at the Stock State Indicator (SSI) chart on oil (West Texas Intermediate Crude). In spite of the 95% rise in oil earlier this year (from below $30 to over $50), oil has not yet triggered an SSI entry signal. It was last stopped out by our SSI system in September, 2014 at about $93.


Smart money sentiment has bottomed and is on the rise (middle section of the chart below). Open interest is also on the rise (bottom section of the chart below). When both of these indicators are on the rise, higher prices are likely to follow … in the next six to twelve months.


My current time-cycles analysis on oil suggests a bottom to the current correction in September-October of this year followed by higher prices into 2017.


My best guess for a near term low in oil, based on the volume-at-price analysis, is in the $35 to $38 range (which probably means it will go to $30 based on my history of underestimating oil moves).


There are, undoubtedly, some big moves coming in the oil market this year … and I’m personally intrigued by the idea of buying the next low. This time around, however, I’ll be armed with the VQ, volatility based position sizing and my Stock State Indicator system.

I’ll make sure that I know exactly how much I’m prepared to lose if I’m wrong (or early) and that I don’t take my profits too early if I’m right.

Here’s to lighting a fire … and not getting burned,

Richard M. Smith, PhD
CEO & Founder, TradeStops

The TradeStops SSI goes to London …

Shortly after Brexit, I was approached by a major financial publisher in London who asked me if TradeStops could have helped British investors navigate the Brexit crisis.

“Send me some stocks to review and I’ll get back to you within a couple of weeks,” I replied.

I think that you’ll be interested in what I found.

The publisher sent me the list of the 30 most actively traded “deals” on the London Stock Exchange for the week prior to Brexit. (BTW, I still haven’t found a good explanation of why or when a stock is referred to as a “deal” in the UK. If there are any financial Brits out there who can enlighten me on this point, I’m curious.)

Of these 30 actively traded “deals”, 28 of them had at least two years of historical data, which is our minimum requirement for running our Stock State Indicator (SSI) system. So we ran our indicators against these 28 stocks to see how the TradeStops SSI would have performed.

The Brexit vote occurred on June 23, 2016. The first day of post-Brexit market activity was June 24th. So we took the closing prices as of June 23rd as the pre-Brexit cutoff date.

The first striking result that we found was that fully 19 of these 28 stocks, over two-thirds of them, were stopped out by the TradeStops SSI system before Brexit ever even happened.

A great example of one of the stocks that was stopped out prior to Brexit is British Telecom. BT enjoyed a nearly 7 year run of solid and steady gains prior to being stopped out by our SSI system just 10 days prior to Brexit.


From the time it triggered an SSI entry signal in late 2009 to the time it finally stopped out on June 13, 2016, it enjoyed a gain of 270%. Since stopping out, the stock is down about 2%.

Many of these 19 stocks that stopped out prior to Brexit are down a lot more than that. In fact, the average decline of these 19 stocks during the first week of post-Brexit market action was a shocking 17%.

Think about that for a minute. For 19 of the 28 stocks we reviewed (again, that’s over two-thirds of the stocks we analyzed) TradeStops was already on the sidelines … and the average decline of those 19 stocks during Brexit week 1 was 17%. That’s a whole lot of stomach churning losses that TradeStops would have completely avoided.

What about the remaining 9 stocks that weren’t stopped out prior to Brexit?

Four of them were already in the SSI yellow zone (aka the Low Risk Zone). All 4 of these stocks were stopped out on the first day of post-Brexit market action. The average gain on these 4 stocks from SSI entry to their Brexit exit was 193% and the average holding period was about 5 years.

One of the four stocks that were stopped out during Brexit week was Barratt Developments. The chart below shows how the TradeStops SSI system performed on this stock and how it was stopped out on June 24, 2016 – the first day of post-Brexit trading.


The average loss over the first week of Brexit for these 4 stocks was 11%.

That leaves us with 5 stocks remaining of the original 28 stocks we analyzed. These 5 stocks were all solidly in the SSI green zone at the time of the Brexit vote. How did these 5 stocks perform post-Brexit?

One such stock was Royal Dutch Shell. You can see in the chart below how the TradeStops SSI system went long RDSB in mid-2009, stopped out in late 2014 for a gain of about 125%, got long again in early 2016 (at a lower price) and stayed long through Brexit and on to new highs.


In fact, these 5 stocks that were in the SSI green zone at the time of Brexit weren’t even down during Brexit week 1. On average they were actually up 3.5% during the first week of Brexit … and are all solidly up even more since then.

Needless to say, my publishing colleagues in the UK were impressed with these results … and their readers will very soon be hearing a lot more about how TradeStops can help them to be more successful investors.

I hope that these results are inspiring to you too,

Richard M. Smith, PhD
CEO & Founder, TradeStops

Time to run for the hills?

As I write this, once again a sense of impending doom is settling over the stock market as the recent breakout rally falters. I can hear the bears saying, “Now that the market has brought in all this new money, it’s really set up to fall.”

Yes? No?

Let’s take a look.

A chart I’ve shared many times before is the SSI chart on the S&P 500. The broad stock market has risen relentlessly since March of this year, triggering an SSI entry in April and then getting the Brexit driven extra energy it needed to breakout to new highs.


The Brexit boost was needed to finally breakthrough the massive overhead resistance that I’ve been showing all year long via the volume-at-price (VAP) chart on the S&P 500:


The breakout, having been decisively established, is now being tested by a two week rolling top and a drop of about 1%. What’s astonishing is the sense of fear and foreboding that has manifested from such a miniscule pause in the market’s climb.

It’s said that markets climb a wall of worry. It’s clear that there is plenty of worry left in this market to fuel a further climb.

I always make it a point to pay attention to what the “smart money” is doing. I track the smart money primarily by looking at the commercial hedging data from the futures markets (aka the commitment of traders data published by the Chicago Board of Trade).

Where I differ a bit from other students of this important data set is that I don’t assume that the smart money is always right. For example, back in April of this year I shared with you the chart below (since updated) showing a huge drop in the position of the S&P 500 commercial hedgers.


Counter-intuitively I predicted that that this huge shift to negative sentiment by the “smart money” often led to higher prices to come instead of lower prices. I showed, via careful study of 30 years of historical data, that the S&P 500 was higher 7 out of 8 times following such moves and that the average six-month gain was +4.5%.

As of right now, 4 months into this current move, the S&P 500 is up … 4.4%. We’ve still got two months to go.

Part of the current “fear” narrative is being driven by the fact that the Dow Jones Industrial Average has just ended an 8-day losing streak. That hasn’t happened in a long time and the financial media is making a big deal out of it.

Again, when you look at it on a chart, you can see that that the sum total of this “8-day losing streak” is a correction of about 1%.


Talk about making a mountain out of a molehill.

Yes, we could see more downside in the stock market over the next couple of weeks but the path of least resistance is definitely higher.

As a final piece of evidence to support this thesis, take a look at the “smart money” hedging activity in the DJIA itself.

Part of the subtlety of working with this sentiment data is that the same data set works differently for different markets – particularly for purely financial instruments vs. real commodities.

Currently the smart money in the DJIA futures market is at a bearish extreme not seen in decades. You can see that in the bottom section of the chart below. You can also see in the chart below how, in the past, these extremes have tended to resolve with higher prices – following brief sharp corrections.


Once we see the smart money take their foot off the brakes in the DJIA (and see that bottom black line rise back above the bottom red line) we can expect further upside in the DJIA.

I want to be a stock market bear … but I just can’t find my way into that cave yet.

Staying alert,

Richard M. Smith, PhD
CEO & Founder, TradeStops

How to Buy with Red SSI

A question I get a lot is, “What do I do if there’s a stock I want to buy but your SSI indicator is red on that stock?”

Just for the record, our SSI system is a three colored “stop-light” style indicator that can be green (safe to buy), yellow (still safe but flashing some warning signs) and red (get out of the water and wait for things to settle down).

Tesla Motors (TSLA), for example, currently has a red SSI. Here’s a screenshot of the Stop Loss Analyzer in TradeStops on Tesla today:


The SSI on Tesla turned red back in February of 2016 after Tesla fell nearly 50% from its September 2014 high of $286. The SSI stop loss on Tesla was hit when it fell below $178.64 (about 38% below its $286 high) on February 3, 2016. The SSI indicator officially turned red at that time.

So … what to do if you’ve really got your heart set on buying Tesla today? (BTW, I realize that most of our readers aren’t huge Tesla fans.)

You’ve got a few options.

  • My personal favorite option (and the one best supported by all of our research) is … wait for the SSI indicator to turn green before you buy! I’ll share with you more below regarding why this is the approach that I favor.
  • Use a full VQ% trailing stop on Tesla from the most recent close. This is actually what TradeStops is showing you in the screenshot above. The latest close as of this writing was on 7/29/1016 at $234.79. The current VQ% on Tesla is 35.76%. Your initial stop loss would be 35.76% below $234.79 at $150.83.
  • Use a different percentage trailing stop from your entry price – whatever you personally are comfortable with.

Ultimately, TradeStops is about giving you the tools to know your risks and make the decisions that are right for you. That’s true of any of the three scenarios I’ve mentioned above.

But let me take a little time and tell you why I personally favor option #1 – waiting for the SSI to turn green. In a word – gold.

I’m a big believer in gold. My favorite analysts all love gold too and have big compelling questions about the soundness of our current economy. Gold, however, severely disappointed the gold bulls for more than three years … and the SSI indicator was red the whole time (from March 2013 – March 2016):


Being wrong 3 or 4 times over a period of several years … before you’re finally proven to be right, is not something that I have the stomach to do – nor do most investors. Staying out of even one of these situations over the course of your investing lifetime is priceless.

Further evidence that it’s best to stick with investments that have green (or even yellow) SSI states comes from our recent study of how to beat the Dow Jones Industrial Average by using just the DJIA stocks themselves. Our research conclusively showed that by favoring the DJIA stocks with green or yellow SSI states, we outperformed the DJIA:


As an investor, I like to stack the deck in my favor … and my research has repeatedly shown that stocks with an active SSI (green or yellow state) do better than stocks that have a red SSI. Of course, sometimes markets overreact and make mistakes. No doubt about it.

19 times out of 20, I’ll pass on red SSI stocks and wait for them to turn green or find another stock to invest in. The 5% of the time that I might decide to buy a stock with a red SSI I work to further limit my risk by doing things like only buying half of my position … and I use a full VQ% trailing stop from my entry price.

Warren Buffett famously said, “The stock market serves as a relocation center at which money is moved from the active to the patient.”

To patience,

Richard M. Smith, PhD
CEO & Founder, TradeStops

Unprecedented moves in gold and silver

Gold has had a strong uptrend in place since February when it triggered an SSI Entry signal and the chart continues to look good.

There’s no doubt that gold has had a fantastic and well-deserved run in 2016. The strength of the unrelenting rally has caught many off-guard, myself included.

Every week that I look at my charts, however, there is one thing about the gold chart that literally jumps off the page. It’s the unprecedented moves in commercial hedging and open interest.

Even in the nearly 10-year chart of gold below, you can see that the bottom two sections of the chart are reaching extremes that haven’t been seen in decades … and are doing so very quickly.

Let me take just a minute and remind us what these indicators mean.

The “commercial hedgers” data comes from what is known as the “commitment of traders” data published by the Chicago Board of Trade on the futures markets. The “commercial” component of this data gives an indication of how the actual producers and consumers of each commodity are currently positioned in the futures markets.

You can see in the chart above that the producers and consumers of gold are locking in their future commitments. Producers are very happy to sell at these prices and they’re not waiting around to speculate on possible higher prices to come.

Open interest tells us how many contracts are open in the given futures market. It’s an indication of how many participants there are in this particular market – how much interest there is in the market. Open interest is growing rapidly in the gold market. More people are getting involved.

By the way, not surprisingly, the exact same situation is happening in the silver market as well:

As always, when I see dramatic moves like this, I look to history to find similar set ups from the past to get an idea of what might unfold in the future. I found a few compelling examples for our consideration.

First, platinum. Back in late 2012 we saw similarly sharp selling by platinum producers together with rising open interest. Platinum was in the news a lot back on 2012.

The following chart shows how the situation has played out in platinum since those dramatic moves.

Platinum peaked shortly thereafter and hasn’t recovered since.

Another similar set up occurred in the corn market back in 2011. Producers sold like crazy and the corn market got a lot of attention. Prices rose for a short while longer, dropped, rose sharply a year later, and then finally fell off decisively.

I’ve looked at least a dozen similar setups across various commodity markets … too many to publish here … and they all were followed by peaks in the given commodity within twelve to eighteen months of the bottoms in commercial hedging and peaks in open interest.

Now I know that twelve to eighteen months seems like a lifetime to today’s investors, but it really isn’t that long. The current set up shouldn’t be interpreted by anyone as a signal to run out and sell all their gold and silver today … but it is definitely something to keep an eye on for the not too distant future.

Staying data driven,

Richard M. Smith, PhD
CEO & Founder, TradeStops