It’s no secret that the markets have been extremely volatile for the past month. Even though the DJIA rallied almost 700 points the last two days of the month, October turned out to be the worst month in the last seven years.

At the investment conferences we attended, the chatter was all about whether we are entering into a new bear market. After all, this is already the longest bull market in history and it’s been a decade since the last bear market.

Unfortunately, nobody knows the answer. Are we going to enter a bear market? Of course, there will always be bear markets, but is this the beginning of the next one? There are lots of guesses, but nobody knows.

As an individual investor, the ultimate decision to sell is in your hands. It’s never an easy decision, especially since there could be taxes involved and there’s an emotional fear of missing out if the markets turn around and begin moving higher.

There is no one-size-fits-all solution to determining when you should move your portfolios to cash. However, that doesn’t mean you shouldn’t have a pre-determined exit strategy for each stock and your overall portfolio. We’ve talked about the importance of committing to an exit strategy before you invest and we’ve highlighted a number of ideas supported by our research in the past.

    • The Sector ETF StrategyTradeSmith wrote about this strategy in February. It says, in part, if one of the SPDR ETFs stops out to sell, and if fewer than seven ETFs are active (Stock State Indicator in Green or Yellow), let the stopped out positions stay in cash. Since writing that article, there is a new sector ETF. XLC is the ETF for the new Communications sector. It doesn’t qualify yet to have a Volatility Quotient (VQ) or SSI signal. But even if it did, the majority of the sectors are in the SSI Red Zone and not in a healthy condition.

SSI Status for Sector ETF’s
    • The 40% Rule — Our research has shown increased risk to the downside in the markets when 40% or more of the stocks in the DJIA are in the Stock State Indicator (SSI) Red Zone. According to Ideas by TradeSmith, all of the major indices we follow are in the SSI Red Zone. The DJIA has 40% of its stocks in the SSI Red Zone while the S&P 500 has 58% in the Red Zone. The S&P 400 has 61% in the Red Zone, the S&P 600 has 59% in the Red Zone and the Nasdaq 100 has 63% in the Red Zone.
    • The Major Indices — What if you decided to exit when the major averages all move into the SSI Red Zone? It’s a little trickier here. It would make sense that if all of these averages are trading in the SSI Red Zone, then that would be a good time to exit and go to cash until we get new SSI Entry signals on these indices.
: SSI Status of the Major Indices
  • The PVQ Solution — One of the smartest tools in TradeStops is the Portfolio Volatility Quotient (PVQ) Analyzer. This tool looks at the correlations between all the stocks in your portfolio to determine the normal volatility of your overall portfolio.
    In a well-diversified portfolio, the individual stocks will not move together. Some will move down while others move up. And the amount that they move higher or lower is different with each stock.The PVQ Analyzer measures these differences to determine your portfolio’s normal volatility.If overall portfolio performance drops by more than the PVQ, it would be a sign that the portfolio’s normal volatility had been exceeded. That could be a good time to exit the entire portfolio.

So, if you’re following your TradeStops alerts, you’ve probably stopped out of many, if not most, of your positions and you’re in cash, which can be a big jolt. Many people think that moving to cash is a sign of weakness. We believe the opposite; cash is strategic. It gives you the opportunity to more objectively assess the overall condition of the markets and to find the best stocks moving forward — because there is always opportunity in the markets.

In our last Monday Education piece, we talked about the importance of Watch portfolios, and hopefully you are using those to your advantage now, looking for your next opportunity.

In addition, you can also follow our Tuesday and Friday editorials for additional market analysis.

  • We wrote about small-cap stocks being a safe haven in the spring and they outperformed nicely all summer.
    The S&P 600 hit its SSI stop in mid-October

    After making its high at the end of August, the S&P 600 Small CapIndex dropped quickly and hit its SSI Stop signal in the middle of October.

  • More recently, we wrote about opportunities in cannabis stocks and consumer staples.

Here’s another great way to find new opportunities in a market full of caution. TradeSmith used the same algorithms behind TradeStops to harness market volatility and uncover new strategies and stock ideas that consistently out-performed the market. Earlier this year, we brought these strategies to life in our latest solution, Ideas by TradeSmith, designed to help you find great stock ideas using a top-down approach to evaluating opportunities.

It begins with an overview of the market in Market Health, revealing a comprehensive look across the major market indices, sectors and industries through the lens of TradeSmith’s most powerful algorithms.

Here you’ll find an insightful overview of the S&P 500, 600, Nasdaq and Dow — plus you’ll learn which sectors are hot in each.

After discovering what industries and sectors are performing well, you can drill down to individual stocks using TradeSmith’s most popular strategies, such as Kinetic VQ, Best of the Billionaires and Low Risk Runners.

Finally, you can use Ideas by TradeSmith’s incredible Stock Finder tool to locate stocks that match the criteria that’s most important to you.

Since we launched Ideas by TradeSmith, each individual strategy has soundly out-performed the S&P 500 anywhere from 30% to 90% and has created incredible profit potential for our users.

And, in just a few weeks, we’re going to launch our latest update to Ideas by TradeSmith, with even more functionality and more powerful tools.

I’m traveling for a conference next week, so Marina and I will discuss exit strategies and how to manage stocks that are in the SSI Red Zone during our next educational webinar on Wednesday, Nov. 28, at 1 p.m. ET. Click here to register.

But in the meantime, look for details in our Thursday Insider newsletter to register for a live webinar next Tuesday, Nov. 13, where we’ll debut the powerful new tools in our Ideas by TradeSmith 2.0.


Tom Meyer
Education and Research Specialist, TradeSmith