A question I get a lot is, “What do I do if there’s a stock I want to buy but your SSI indicator are red stocks?”
Just for the record, our SSI system is a three colored “stop-light” style indicator that can be green stock (safe to buy), yellow stock (still safe but flashing some warning signs) and red stock (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 of your red stock 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.”
Richard M. Smith, PhD
CEO & Founder, TradeStops