The historically strong move up in the stock markets since Christmas Eve 2018 has many TradeSmith members wondering why we haven’t seen more of the stocks and ETFs they follow trigger Stock State Indicator (SSI) Entry signals.

It’s a great question. After all, it’s tough being on the sidelines and seeing the markets move higher almost daily. The financial media does a great job of letting you know how much the market has moved higher since the bottom was made on Christmas Eve.

And being patient is the most difficult thing to do as an investor. A common phrase we hear is, “There’s always a bull market somewhere.” So it’s natural to think we should be doing something to help grow our portfolios.

When is a good time to get back into the stock markets? Let’s take a step back and look at this from a couple of perspectives.

A couple of weeks ago, Dr. Smith wrote an important article about a study of the factors that contributed to stock market success over the past 200+ years (you can access that article by clicking here).

Not surprising to us was the No. 1 factor: Trend-following. “Over the two centuries [studied], trend-following worked better and more reliably than any other factor … with a strong and consistent risk-adjusted return.”

And that’s what TradeStops is all about. Let’s review what needs to happen for a stock to trigger an SSI Entry signal and move into the SSI Green Zone.

The SSI Entry signal requires two things to happen. The first thing is that a stock must be at least one Volatility Quotient (VQ) unit higher from its recent bottom. The second thing is that the SSI Trend Line must be moving higher. The VQ is easy to measure, but the SSI Trend Line calculation is proprietary and determined internally within the TradeStops program.

Let’s take a look at both of these conditions. Here’s the chart for Celgene (CELG), a biopharmaceutical company. CELG hit its SSI Stop signal back in October 2017 at $99.99. Its lowest point was on Christmas Eve at $59.21 with a VQ at the time of 22.6%.

CELG historical VQ chart

To meet the first condition for triggering an SSI Entry signal, CELG had to climb at least 22.6% higher from its $59.21 close on Dec. 24. That means the stock had to move $13.38 higher, which would put the stock price at $72.59. That happened in early January.

Because the stock had dropped so dramatically, it took a while before the SSI Trend Line could turn upwards. This finally happened — as indicated by the dotted blue line in the chart shown above — and the new SSI Entry Signal occurred on March 6.

Keep in mind that the SSI Entry signal is meant to be a conservative signal. The SSI signals will not get you into the market at the bottom and will not get you out of the market at the top. The signals are meant to take advantage of stocks and funds once they’re in defined uptrends.

That doesn’t mean you can’t try to get a head start on stocks and look for those that are near a new SSI Entry signal. This takes some research and a little bit of luck, too.

Here’s the chart for Apple Inc. (AAPL). The bottom on AAPL occurred during the first week of January at $141.58. With a VQ at the time of 17.38%, the price of AAPL had to rise to $166.19 to satisfy the first requirement for a new SSI Entry signal.

AAPL historical VQ chart

The price of AAPL moved higher and exceeded the 1 VQ move higher in early February. But so far, the SSI Trend Line has moved from a downward slope to a flat slope. It will take a little longer for it to begin moving higher, even if AAPL continues to move higher.

If you’re confident that AAPL will continue moving higher, or want to begin building a position in AAPL, now could be a good time to start. The stock is still well below its SSI Stop signal from last November, but it has moved higher by more than 1 VQ unit. Keep in mind that AAPL is still in the SSI Red Zone and it will take some more time for it to trigger the SSI Entry signal.

If you’re interested in learning more about this, take a look at the ETFs for the major indexes. As of this writing, two of them (MDY and SPY) are already in the SSI Green Zone, but the other three (DIA, IWM, and QQQ) are still in the SSI Red Zone.

SSI status for five major index ETFs

All of these have moved higher by more than 1 VQ, but are just waiting for confirmation of the new uptrend from the SSI Trend Line. Those confirmations should occur very soon if the trends continue.

We’ll be discussing this in more detail during our educational webinar on Wednesday, March 20 at 1 p.m. Eastern. To sign up for the webinar, register here.

Cheers,

Tom Meyer
Education and Research Specialist, TradeSmith