TradeStops … and true love
Last Valentine’s Day a panicked lover, and TradeStops subscriber, wrote in to say:
Getting tested today as my NAK stock that was up 300% has fallen by 30%. Hoping it’s a flash crash, so I’m not going to panic. But OUCH!
NAK is Northern Dynasty Minerals – a widely held junior gold mining stock with a compelling mining opportunity in Alaska.
It’s easy to fall in love with a stock like NAK. It’s been recommended by at least two highly respected investment advisory services. It controls the world’s largest undeveloped gold deposit … and that deposit is in Alaska, a place where there’s a reasonable hope of actually extracting the gold. There is also some hope that regulatory burdens may be lightened under the Trump administration.
It’s also been up over 500% in the past six months.
Believe me, I’m all for love. Investing should stir the heart. But as in all romantic relationships, we need to be clear about the rules of engagement.
That’s where TradeStops enters the picture. TradeStops establishes the boundaries within which investing romances can flourish … and the terms on which the engaged parties can agree to go their separate ways. TradeStops is like an investor’s prenup.
Let’s take a look at how TradeStops helped thousands of subscribers keep their relationships with NAK alive when a shock event threatened to derail the budding romance.
Just to get us visually oriented here, let’s take a look at the current SSI chart on NAK.
It first triggered an SSI Entry signal on May 23, 2016 at $0.38 per share. Ten months later, on January 24, 2017, it made a new high of $3.32 per share … a gain of 773%.
NAK has been recommended by a couple of prominent investment advisory services with large readerships. One service recommended it at $0.74 per share and another at $2.05 per share.
Thousands of TradeStops subscribers have positions in NAK … many of them up hundreds of percent.
NAK is one of the highest volatility stocks I’ve ever seen recommended in a widely read investment advisory service. Its TradeStops Volatility Quotient (VQ) is currently 72.2%.
That means that investors in NAK should be prepared for a correction of up to 72.2% if they intend to hold the stock for a year or more. Like I said, it is a very volatile stock.
Last week, on Valentine’s Day, a New York-based hedge fund came out with a scathing critique of NAK … and announced that they were shorting the stock (i.e., hoping to profit by the stock falling in price).
NAK fell as much 40% on Valentine’s Day, February 14. It had closed at $3.18 the day before and it hit an intraday low of $1.92 on February 14, before finally closing at $2.50.
So … what was the TradeStops response to the wayward behavior of NAK this past Valentine’s Day?
“Ho hum … That’s to be expected.”
Let’s take another look at that SSI chart on NAK …
Again, NAK has a VQ of 72%! As of the most recent close of $2.26, it’s down 32% from its recent high. Yes, that’s a dramatic drop, but it’s not even half of what investors in NAK should be prepared to accept in NAK.
NAK hasn’t even dipped into the SSI Yellow Zone yet.
I’m sure that many investors in NAK sold in a panic this past Valentine’s Day. Many of them probably got out near the bottom range of the day around $2.00 per share and then had to watch NAK rise into the close to $2.50 per share.
I’ve said it before, watching the prices of stocks intra-day is bad for your health … and bad for your portfolio.
True love requires trust. Given that we’re not all saints, trust between partners requires boundaries. TradeStops provides investors with the boundaries required to let love … and profits … flourish.
Investors in NAK with a plan to sell and the right position sizes for their portfolios had nothing to worry about this past Valentine’s Day. It was all part of the normal expected course of business.
Richard Smith, PhD
CEO & Founder, TradeStops
Implementing 2 VQ Alerts in TradeStops
For the past few months, we’ve talked about the 2 Volatility Quotient (VQ) strategy in TradeStops. We originally presented this idea of Doubling up on your winners and have since followed up with several other articles. There are good discussions about the 2 VQ strategy here and here.
Many of our members want to know how to set up 2 VQ alerts in TradeStops so that they can easily implement this strategy. We don’t have a specific “2 VQ” alert, but it’s easy to get around that.
We’ll set up a separate portfolio for this and use a stock that has had a strong uptrend for the past year as our example.
Here’s a new Watch portfolio titled “2 VQ”.
Next, we’ll add the stock Nvidia Corp. (NVDA) to the 2 VQ Portfolio. NVDA has had a strong run in the past year and is trading close to its high.
The Stock State Indicator (SSI) Entry date for NVDA was almost a year ago on 2/22/2016. The price at that time was $31.22. It is still trading in the SSI Green zone.
The VQ at the time was 20.80%.
Let’s assume that we decided to take a position using $1000 of risk. In other words, we were willing to risk $1000 of NVDA’s normal volatility on the trade.
We can use the Position Size calculator to determine how many shares we could have bought. When you go into the calculator, you can change the Entry Price so that you’ll be able to use the exact historical price. Then, set up the stop loss strategy as a trailing stop using the historical VQ.
The calculator lets us know that we can buy 153 shares of NVDA.
We can now add that position into our 2 VQ portfolio. We’re going to use an SSI alert for this position.
As you most likely know, you can have more than one alert set up in TradeStops. Here is where we’re going to add the 2 VQ alert. It does require a little work on our part before we can enter this alert.
The VQ at the time of purchase was 20.80%. We’ll multiply this number by 2 and we come up with 41.6%. This is the alert we want to create for this position. In the “Positions and Alerts” tab, click on the “Alerts” tab and then we’ll add an alert.
Click “Next” and then the Alert window opens up. We want to set up a “Price” alert that notifies us when NVDA has moved 41.6% above the entry price.
This 2 VQ alert will then trigger at 41.6% above our entry price. That works out to $44.21. It’s that easy.
We can now repeat the process for the additional 2 VQ trades that have triggered. Here is a list of all of the 2 VQ purchases of NVDA.
This is the current 2 VQ Portfolio in TradeStops. There are a total of 4 positions. Each of these positions has 2 alerts. The first alert is the SSI alert to let us know when the SSI Stop is triggered. The second alert is the 2 VQ Price alert that we originally created for each position.
The triggered alerts are in purple. The alerts that are not triggered are in black. The triggered alerts are the first 2 VQ alerts that we set up. The 2 VQ alert for the last position of NVDA has not been triggered.
Setting up the 2 VQ alerts are easy. If you have some additional questions about this, please send us an email to email@example.com and we’ll be glad to answer them.
To profitable trading,
Education Director, TradeStops
Being right … or making money. That’s the choice we investors often face. I’ve been warning of bearish signs in the US Stock Market for weeks now. I’ve been wrong … but I’m still long.
There are a lot of reasons to be concerned about this market. Last week
, I showed you that the CBOE Volatility Index (VIX) recently traded below 11 and was heading down towards 10. This is a condition we haven’t seen since before the market crash in 2008.
Even my time-cycle forecasts have been showing that the market should be topping. This was what I showed you last week. It looked like the S&P 500 was ready to move lower.
It hasn’t happened the way I thought it would.
Instead, the markets have continued to make new highs for the past three months since the elections. The S&P 500 is solidly in the SSI Green zone and hasn’t even touched the Yellow zone since giving us a new SSI Entry signal in April, 2016 (I didn’t want to believe that signal
And it’s not just the S&P 500. The other major averages are all hitting new highs including the Dow Jones Industrials, the Nasdaq Composite, and the Russell 2000.
This uptrend could continue for a while.
In the past 40 years, the S&P 500 has had strong moves to the upside when the Volatility Quotient (VQ) started to rise from the 10% area. The only time this didn’t happen was during the bear market of 2007-2009.
If history repeats itself, we could see another year or even more of this strong upward trend. This has been a historically powerful rally.
It’s all over the news this week how a major mutual fund lost $600 million in the past week as the S&P 500 continued to defy gravity and undo their bearish bets.
I’m thrilled to say that I’ve learned to be wrong and still be long. It’s been one of the most impactful changes for the better in my personal investing. I no longer confuse my ideas about what might happen with what is still actually happening.
I’m still bearish overall on the S&P 500 in the short-term, but I’m happy to wait for the market to confirm my thesis … and I’m happy to be wrong if it doesn’t … and to still make money.
To incredulous profits,
Richard Smith, PhD
CEO & Founder, TradeStops
Optimizing covered calls with VQ
I’m often asked the question, “Can the TradeStops Volatility Quotient (VQ) help with covered calls?” Today, I’ve got the beginnings of an answer to that important question.
Covered calls are a popular strategy for generating income from your existing portfolio and doing so with limited risk. If you own 100 shares of Walmart, for example, you can sell a covered call option against your Walmart shares. Here’s how it works.
Walmart is currently trading around $68 per share. There are options buyers out there right now who are willing to pay you $1 per share today ($100 total for your 100 shares) if you will give them the right to buy Walmart stock from you at $70 per share any time before April 21, 2017.
This options “contract” is known as the “April 21, 2017 $70 call” on Walmart. The “strike price” is $70 and the expiration date on the contract is April 21, 2017. The $1 per share that you receive equals 1.47% extra income that you’ve generated from your Walmart stock on top of any dividends you will receive.
As an owner of 100 shares of Walmart, you can sell one of these contracts and your contract is covered in the sense that if the the buyer of the contract exercises the right to buy the shares from you, then you’re covered because you already own the shares.
If Walmart trades above $70 per share before April 21, 2017 then you will likely have to give up your 100 Walmart shares for $70 per share.
That’s the very basics on covered calls. If you want more details, you can learn more here.
So … hopefully you can now see that if you’re an investor looking to sell covered calls, it would be great to be able to find just the right covered call to sell that would maximize your income or profit while minimizing the likelihood that you will end up having to sell your existing shares.
That’s the challenge we set out to investigate.
To do so we decided to use the S&P 500 going back over 50 years to 1965. The first question that we asked ourselves was how many days, on average, did it take for the S&P 500 to move one VQ?
Just looking back over the bull market of the past 8 years, you can get an idea of what I’m talking about. The chart below shows how many calendar days it has taken the S&P 500 to move up one VQ for each leg of this bull market.
Going back to 1965, we found that on average, it took 210 days for the S&P 500 to move, up or down, by one VQ.
We also asked how long it took, on average, for the S&P 500 to move ½ VQ as well as ¼ VQ. The answers were 115 days and 65 days respectively.
The following chart shows the three data points that we found. ¼ VQ = 65 days. ½ VQ = 115 days and 1 VQ = 210 days … and then we drew a line in between these three points.
So, what exactly are we looking at here? We’re looking at a chart that answers the question, “Over the past 50 years, how many days has it taken on average for the S&P 500 to move x VQ’s?” (Sorry for introducing a little algebra here but it was unavoidable if I wanted to share this with you.)
Our goal is to find a way to capture as much income as we can and still have a better than 50% likelihood that the call options we sell will expire worthless (and we’ll get to keep our shares).
Many investors like to sell options that expire 30-60 days in the future. This allows them to easily manage their option trades. Using this criteria, we could sell a call on SPY with a strike price that is ¼ VQ out-of-the-money, 65 days in the future, and there is a slightly greater than 50% chance that the call will expire worthless.
Here are a few details if we wanted to execute this strategy.
SPY is trading at about $232.50. With a current VQ of 10.4%, that means ¼ VQ = 2.6%. When we multiply the current price of SPY by 2.6% we get $6.05. So we’d be looking to sell a call that expires about 65 days in the future and for which the strike price is $6.05 “out of the money.”
To find a call option with that strike price we take the current price of SPY ($232.50) and add $6.05 to it to get a strike price of about $239. Looking 65 days into the future puts us right at about the April 21, 2017 monthly options expiration date.
Thus, our optimum covered call to sell would be the $239 strike price with an April expiration. Currently, that call is selling for around $1.04 which is additional income of 0.45%. That’s a 2.6% annualized return.
SPY currently has a 2.29% dividend yield so it’s possible to effectively double the income generated from SPY by using this strategy.
We could also go out about 115 days, or 4 months, in the future and sell a call with a strike price that is ½ VQ, or about $12 out of the money. And if we wanted to try to maximize the capital gain in our trade, we could sell a call on an option that is a full 1 VQ, or $24, out of the money and expires in 8-12 months.
I think that this is pretty exciting research and I know that many of you will find it very exciting as well. It’s not yet available as a service in TradeStops but I did want to let you know the direction in which we’re thinking.
If you have feedback on this research, we’d love to hear it.
Always balancing risk and reward,
Richard Smith, PhD
CEO & Founder, TradeStops
A troubling signal from the VIX
It’s often said that bull markets climb a wall of worry. That’s certainly been true of this eight-year long bull market. Investors have been nervous and incredulous about this bull market ever since the bottom in early 2009.
What we’re seeing today, however, suggests that all the worry that’s fueled this bull market may have finally been used up.
The CBOE Volatility Index (VIX) measures the short-term volatility of S&P 500 options. In the media, it’s called the fear index. Usually, as the S&P 500 is moving higher, the VIX is moving lower. Institutional traders trade VIX futures all the time and use the VIX as a way to hedge against possible downward moves in the stock market.
Going back over 20 years, the VIX has traded with a strong area of support between 13–17 as can be seen in the volume-at-price (VAP) chart below.
The VIX has been creeping closer and closer to the 10 level. It recently moved under 11 during the last week of January.
Why is this level important? Because, the last time the VIX traded at this level was in 2007 before the market crash of 2007-2009.
You can see the critical 10 level in the bottom area of the chart below. You can also see what happened to the S&P 500 the last time we saw the VIX dip below 10 in early 2007.
There is also a very stable one-year time cycle on the VIX that has been very accurate over the past decade. This cycle is showing that we’re currently close to the low on the VIX and likely moving higher from here.
Each time that this cycle bottomed, the VIX moved higher going forward. And that usually means the S&P 500 is going to move lower.
The time-cycle forecast for the S&P 500 also shows that the market is close to hitting its top and could well move lower over the next few months.
I’ve shared my concerns about the current state of the US stock market several times recently. I’m still favoring a move lower in US stocks in the first half of 2017. The fact that the VIX may very well be forming a significant bottom here close to 10 only adds to those concerns.
Of course, the TradeStops Stock State Indicator (SSI) is still solidly green for the S&P 500.
Letting our winners run is part of our core philosophy. I’m not hitting the panic button on US stocks by any means, but I do believe that it’s a time for caution and definitely not a time for irrational exuberance.
Have a great weekend,
Richard Smith, PhD
Founder & Creator, TradeStops
SSI vs. 200-Day Moving Average
A reader once again challenged us to test our Stock State Indicator (SSI) strategy against a widely followed Wall Street strategy – the 200-day simple moving average (SMA) strategy.
We’re up to the challenge. Let’s get started.
For the past few weeks we’ve been putting our SSI system to the test against buy and hold strategies on the Dow Jones Industrial Average (DJIA) over the past 50 years. We’ve shown that:
- Even following our most basic SSI strategy nearly doubles the percentage gain and more than doubles the reward-to-risk ratio;
- Adding our “add-to-your-winners every 2VQ’s” strategy makes the outperformance nearly absurd.
Here’s the chart to remind you where our current research results stand.
So … what exactly is a 200-day SMA strategy? It’s simple. You buy the DJIA when the price of the DJIA is above the 200-day simple moving average (SMA) of the DJIA. When the DJIA is below the 200-day SMA, you are out of the market.
Our SSI system is similar in that it is a trend-based strategy – which is why your fellow reader wanted to know if our SSI strategy outperformed the 200-day SMA strategy.
By the way, the 200-day moving average is calculated using 200 trading days, not 200 calendar days. Since there are approximately 250 trading days in a year, the 200-day moving average works out to just under 10 calendar months.
So let’s see how the DJIA has performed over time using both the 200-day moving average strategy and the two strategies that use the TradeStops SSI signals on a reward to risk basis:
I think you’d agree the chart speaks for itself.
How about if we look at it just in terms of simple percentage gains? Here you go.
From 1966 until recently, both of the SSI strategies substantially outperformed the 200-day SMA strategy. While the 200-day SMA strategy returned almost 1300% during the period, the SSI strategy returned almost 2000% and the 2 VQ strategy returned around 2800%!
And … there were far fewer trades using the SSI strategies. The simple SSI strategy had only 19 trades over this 50+ year period, while the 2 VQ strategy had only 31 trades. The 200-day SMA strategy had 194 trades during the same timeframe.
Wow. I’m not usually one to toot my own horn (though I am getting better at it) … but I have to say, I’m impressed.
I hope you are too,
Richard Smith, PhD
CEO & Founder, TradeStops
Equalizing Your Risk
For the last two weeks, we’ve focused on understanding the differences between stock risk (here) and portfolio risk (here). We even have a short video for you that explains these concepts (here).
Today we’re going to show you how to equalize the risk of the different stocks in your portfolio in a way that most likely further minimizes the overall risk of your portfolio.
Last week, we took a broadly diversified portfolio that has seven stocks in seven sectors.
These seven stocks have a Portfolio Volatility Quotient (PVQ) of 12.04%.
We added Franco-Nevada (FNV) to the portfolio. FNV has a Volatility Quotient (VQ) of 31.2% which is much higher than any of the other stocks in the portfolio.
Because these stocks are so well-diversified, we were able to add a high-risk gold mining stock to the mix and actually lower the volatility of the entire portfolio. The new PVQ is now only 11.17%.
Now, there’s one last thing for us to do. We want to be sure that the risk we’re taking in each stock is equalized. This means we are going to take the same amount of dollar risk in each stock. For our new TradeStops members, this is a new concept. We call this “right-sizing” our portfolio.
To accomplish this, we will invest more money in our low risk stocks and less money in our high risk stocks. For instance, we are going to take the same amount of risk in FNV as we take in GE.
And according to Dr. Smith, this is the single most important thing we can do to set up our portfolio for future success. Right-sizing our portfolio forces us to be disciplined and not put too much money in the stocks that have flashy stories. We’ve all probably had the experience of getting excited about a stock and putting a lot of money in it, only to see it move against us and causing large losses in our portfolios.
Here’s an example of what an individual investor could have done by following the TradeStops system and right-sizing their portfolio. The stocks that he owned were not changed.
Let’s take our well-diversified portfolio and right-size it. We use the Risk Rebalancer to do this. All we do is choose our portfolio and then click on the “Rebalance” button.
By right-sizing our stocks, we have actually lowered the volatility of the portfolio again. Now, the PVQ is only 10.78%.
What does this mean for our individual stocks? The right-sizing has equalized the risk in each stock. We are taking about 2% risk in each stock (that’s 2% of the portfolio value) which, in this case, equals about $970.
The Risk Rebalancer makes it easy for us by letting us know the actions we need to take.
Once you’ve rebalanced your portfolio, you probably don’t want to do so again for several months or more. We suggest that for most investors an annual rebalance is sufficient. Active investors might want to rebalance every six months.
The TradeStops tools are designed to give you the best opportunity to build and manage profitable investment portfolios. As Dr. Smith has said “Successful investing is about staying in the game”. And equalizing your risk is a giant step towards being a successful investor.
Always judging risk,
Gold is following our script …
In December and again in January I outlined a script for gold to form a bottom and start a sustained rally through 2017. That script continues to play out nicely … with gold really starting to shine in the past month.
In just the past six weeks, gold has gained over 8% or nearly $90 per ounce. Most critically, it has recently climbed above critical volume-at-price (VAP) resistance at $1,200 an ounce.
The big boys also continue to stake their claim to potential gold profits. The chart below shows how each time the commercial players in the gold futures markets have reached a local extreme (bottom section of chart below where black volume line touches top of red bands) the price of gold has rallied shortly thereafter.
My time cycles also continue to be bullish for gold … both in the short-term:
… and in the long term:
I highlighted the above chart back in December too and mentioned how the real kicker for me would be when the commercial hedgers (bottom section of chart above) add to their position and get back near the zero line.
That would mean that their gold would be officially unhedged and a very strong indication that they’re expecting higher prices ahead. Nice progress has been made in this area in the past month.
Before we get too far ahead of ourselves, however, gold is still in the SSI Red Zone after getting stopped out back in November of 2016.
Yes, we took a small loss on the 2016 SSI entry and exit signals, but I’m fine with being wrong once or twice … and then being right big time after that. (I just never want to be big time wrong.)
I think that the next SSI entry signal for gold could be the biggie. I’m watching the US dollar, which is falling nicely … and I’m watching the commercial hedgers in the futures markets to see when they’re signaling “all in.”
For those looking to dip their toes in the water ahead of a new SSI entry signal, call options or a stop loss around $1,100 both look like good bets to me.
I’m patiently waiting for the fat pitch,
Richard Smith, PhD
CEO & Founder, TradeStops
Chat – Part Two
Back in December, we introduced the Chat feature. Many people have been taking advantage of this useful tool, but there are even more advantages that the chat can offer you that you might have missed.
Let’s say that you are in the program, and you are a little confused about what something means. You don’t want to call, and you don’t want to send an email. You have an alternative!
Just click on the little chat icon in the bottom right corner.
Once you start a chat, you will be connected with an agent.
The agent is able to see exactly where you are in the program. This will allow them to direct you exactly where you need to go in the program to solve your problem and answer your questions.
How Do I Close Chat?
Once you have your answer from the customer service agent, you might want to close the chat window. It might get in your way of viewing some data. This is easy to do.
At the top of the chat box, there is a little horizontal line. If you click on the line, it will minimize the chat window and be out of your way.
How Can I Get a Copy of My Chat?
The customer service agent may walk you through a process-such as updating your credentials for your brokerage site. You might want to save that data. Rather than writing it all down, you can email the Chat transcript to yourself.
- In the bottom of the chat box, click on Options.
- Click Email Transcript
- Type in the Email where you want to send the Transcript
- Click Send
You Can Send a File
You might describe something a little different than how the program describes it. There is no problem with this; it works for you! Your terminology might confuse the agent though. There’s nothing to worry about. You can send a picture to the agent of what you are looking at.
(Please note that you would have to take a screenshot of the area first!)
- Click on Options
- Click on Send a File
- Select the Photo from your computer, and it will be sent to the agent
Please Keep in Mind
While our Customer Service Agents are happy to answer any of your questions, there are a couple of things that you should keep in mind.
- Our agents are not financial advisors. They cannot tell you to buy or sell a position.
- If you notice a calculation error, please note that our chat agents cannot make the calculations for you. Please call us or send us an email.
- Our agents cannot process new orders or cancellations. Please call us at 866-385-2076. Our Call Center is open 9:00 AM – 5:00 PM Eastern.
- It is best to use chat for simple questions. If your question is complicated, please send an email to firstname.lastname@example.org.
Chat Can Help You
We hope that the chat feature will help you with your TradeStops program. The more help you receive, the more knowledge you gain, and knowledge is power.
To Smarter Investing,
TradeStops Customer Success Team
Doubling Up On the DJIA
For the past couple of Tuesdays (here and here), we’ve been exploring how our Stock State Indicator (SSI) system has performed against a buy and hold strategy on the Dow Jones Industrial Average (DJIA) during various types of market conditions.
Today I’m going to show you how what I call our “2VQ” strategy of adding to our winners boosts the outperformance even more.
When we left off last week, we were looking at this chart:
This is a chart of the risk-adjusted returns for the DJIA SSI strategy and the DJIA buy and hold strategy. The SSI strategy greatly outperformed the buy and hold strategy on a risk-adjusted basis.
We’ve talked about risk-adjusted returns before. If you want a more in-depth review you can find it here. The simple idea, however, is how many units of reward did you get for every unit risked. If you can get higher reward for lower risk, you should do it.
Our 2VQ strategy is also known as doubling up on your winners. If you want, you can review the full strategy here. Bottom line … by investing more money as a stock is moving higher, we have the opportunity to increase our profits as the momentum continues to climb.
Here is how our SSI + 2VQ strategy performed against the buy and hold and SSI only strategies:
The “adding to winners” strategy even further increased the rewards gained for the risks taken beyond the gains that the SSI strategy achieved alone. What I particularly love to see is that the outperformance was consistent and enduring. Once the 2VQ strategy pulled ahead, it never relinquished its lead.
It’s great confirmation that our core risk management strategies outperform buy and hold in different market conditions over an extended period of time.
It’s hard to believe that adding to your winners can actually lower your risk but when you look at it the right way, it clearly does.
Make more … risk less. That’s the TradeStops way,
Richard Smith, PhD
CEO & Founder, TradeStops