Over the past several months, we’ve introduced you to new strategies and kept you informed as to our current thinking in the stock market.

If you’ve been reading TradeSmith’s editorials, you know that, given the prevailing economic environment, we prefer small-cap stocks. On Friday, we told you our thoughts about the smaller domestic banking stocks.

The Kinetic VQ strategy is resonating with our TradeStops members. Just last week, we showed you how one member used our new Ideas by TradeSmith to find Kinetic VQ stocks that were nicely profitable.

A quick overview of the Kinetic VQ strategy:

We begin by searching for stocks that have a higher current Volatility Quotient (VQ) than their long-term Average VQ. And the stocks must currently be trading in the Stock State Indicator (SSI) Green Zone.

Why does this strategy work so well? It’s really quite simple.

When a stock has a higher current VQ than its historical average VQ, it’s an indication that there is extra “worry” built up in the stock.

When that same stock starts a new uptrend, that extra worry acts like rocket fuel for the ensuing uptrend because it means that it’s easier for the stock to defy expectations to the upside.

Let’s apply this strategy to small-cap stocks. It takes a little bit of time to set this up in TradeStops, but it’s not difficult at all.

For this example, we want to set up a portfolio of 30 small-cap stocks to follow. We used the top 30 holdings in SLY, the ETF for the S&P 600 Small Cap stocks. In our webinar on June 27, we’ll show you how to easily do this. You can register for the webinar by clicking here. (Even if you can’t make it for the live event, by registering, you’ll receive a notification from us that the recording has been processed and posted to our website.)

Once we set up the portfolio, we sorted the stocks by their VQ in ascending order. It took a few minutes, but it looks as if we have a candidate in RH.com (RH). This stock was formerly known as Restoration Hardware.

S&P600 list of 30 stocks, highlighting RH

Look closely and you’ll see that the current VQ for the other stocks listed is lower than the Average VQ. That’s why the Kinetic VQ stocks are special situation stocks. They’re rare to find.

The Average VQ for RH is 33.05%, but the current VQ is almost 20% higher at 39.2%. The stock originally triggered a Stock State Indicator (SSI) Entry signal in early September 2017. It traded mostly flat from November 2017 until just recently when it shot higher and broke through the highs made in October 2015.

RH performance in the stock market with recent high


Tom Meyer
Education and Research Specialist, TradeStops