The right software tools (coupled with the right approach and mindset) can help you make the smartest decisions for your investments — and your portfolio as a whole — no matter what markets do next.

Preparing for an uncertain future means being aware that different scenarios can unfold.

That is why, in our piece on how to survive and thrive in bear markets we cited the Greek statesman Pericles, who said, “Our job is not to predict the future, but prepare for it.”

Rather than trying to find certainty, we use signals generated by market data. The signals then help us decide what to do (which sometimes means doing nothing).

Earlier this summer, for example, large-cap U.S. stocks were flashing a warning sign.

Below you can see the SSI distribution for the Dow Jones Industrial Average from Ideas by TradeSmith as of June 28, 2018. Back in June, the Dow was in the red zone — with 60% of symbols flashing red in terms of their SSI (stock state indicator) status.

As of June 28, 2018, DJIA had 60% of its stocks in SSI Red Zone

But the Dow has strengthened since then. Rather than rolling over into a full-fledged bear market, U.S. large caps regained strength and pushed back toward highs.

As of mid-September, the Dow is back in the green zone (with 60% of symbols green):

As of Mid-September, Dow is back with 60% of its stocks in SSI Green Zone

So, large-cap U.S. stocks have gone from the red zone back to a healthier green zone state. Meanwhile, U.S. small caps have remained in the green zone virtually the entire time.

The below chart shows three years of history for IWM, the iShares Russell 2000 small caps ETF. As you can see from the colored line below the chart, the green zone status for U.S. small caps has remained unbroken (with just a very fast dip into the yellow zone) for almost two years.

IWM (iShares Russell 2000 small cap ETF) has remained in SSI Green Zone for past 3 years
It makes sense that small caps have been strong because of what’s happening in the world. The domestic U.S. economy has been strong too — which is good for small caps.

The domestic U.S. economy is also relatively sheltered from trade war fallout. Large caps, with their higher levels of international revenues, are more exposed.

Our overall market message for this year has been mixed — neither strongly bullish nor bearish — because the signals from the market have been mixed. There have been real reasons for concern, with the red zone status of large caps this summer capturing that concern.

But the signals’ message for small caps was unambiguous: “As long as small caps stay strong and maintain their green zone status, stay in the trend.”

The beauty of these signals is the way they help clarify decision making.

For all of the concerns that piled up — trade war, rising interest rates, geopolitical worries, and more — small caps just kept on trucking.

And with large caps returning to green zone status, that’s a sign that strength is returning to U.S. markets overall.

Prepare today, profit tomorrow.

Richard_Signature

Richard Smith, PhD
CEO & Founder, TradeSmith