It’s Halloween… and we’ve found a powerful way for you avoid the scariest stocks in the market.
Last week, we showed you how TradeStops could have helped you avoid the 1987 Black Monday market meltdown. This got us thinking how TradeStops could help an investor avoid the sharp moves lower that can occur with individual stocks.
To investigate this question, we turned out our database of “billionaire” trades. We analyzed 1,891 different trades executed by our favorite group of a dozen well-known billionaire investors. The trades all took place over the 30-year period between 1987 and 2017.
What we found probably won’t shock you (if you know us a bit already) but it certainly provides further evidence that our TradeStops strategies are on the right track.
We broke the trades into two groups – those that started their down move in the SSI Red Zone and those that started in the SSI Green or Yellow Zones. A sharp down move was defined to be a move down in one day that was larger than the stock’s Volatility Quotient (VQ).
Before we get to the results, let’s look at a specific example just to make sure that the concept is clear.
On August 2, 2017 Teva closed at $31.09 and the VQ on Teva was 21.8%. One day later, on August 3, 2017, Teva closed at $23.63 – a fall of 24%. Since this 24% fall in one day was greater than the VQ of 21.8% it met our criteria of a one-day sharp move down.
Ok, now that you’re hopefully clear on the concept, let’s look at the results:
Wow. I don’t know about you but I find these results shocking. Now I’m really scared of holding stocks in the Red Zone!
It’s telling us that there is something wrong with the stock. It is not behaving normally. It doesn’t mean it’s going to crash, but it is signaling a red flag.
The red flag was ignored by David Tepper when he bought into Teva and Tepper paid the price. Teva entered the SSI Red Zone on September 25, 2015 at $55.83. It was already down 44% from there when it closed at $31.09 on August 2, 2017 – right before its big move down.
As I wrote over a year ago, Going Green is the smartest strategy to follow if you want to have long-term success in the stock market.
Hoping that your stocks only give you treats,
Richard Smith, PhD
CEO & Founder, TradeStops