Everything we do in TradeStops is about helping investors find investments that can be held for years and generate outsized returns with limited risk.
For the past several weeks, we’ve been looking at how “going green” by using the TradeStops SSI system, does just that. This week I’ve got a powerful new idea to share with you that potentially puts this strategy on steroids.
I do feel a mild cautionary note is in order: this article will be a bit of a tease because what I’m going to share with you is not something that you will be able to easily replicate on your own.
As you know, our TradeStops Volatility Quotient (VQ) is a proprietary indicator that gives investors an easy to understand way to gauge how much a stock is likely to move up or down, over the course of a year or more, just due to volatility or “noise” in the stock.
What you may not yet know is that we update this VQ value on every stock in our database every week. Just like stock prices move up and down, VQ values move up and down as well … and we have that data.
By studying how our VQ indicator rises and falls over time, I believe that we can further juice our SSI system by finding the investments that have built up the highest potential of starting a multi-year run once an SSI Entry signal is triggered.
The key is to look for those opportunities that have built up a good amount of volatility-energy prior to triggering a new SSI entry signal. The S&P 500 provides a great example.
Here is a 40-year chart of the S&P 500. The current VQ on the S&P 500 is 10.9%. You can see in the chart below, however that this isn’t what the VQ on the S&P 500 has always been. In early 2009, for example, it reached a peak of nearly 25%.
The key to identifying investments that are primed for multi-year uptrends is to find those investments where VQ has risen substantially (often as much as 100%) and is poised to start declining as a new uptrend takes hold. This built up “VQ-energy” is like fuel that has been stored up. The SSI entry signal is the fuse that lights the fire.
Each peak in VQ in the chart above corresponded with a bottom in price for the S&P 500 … and the start of a multi-year uptrend.
Even though I said this “is not something that you will be able to easily replicate on your own”, that’s not entirely true. With the recent enhancements to the Stock Analyzer, it’s easy to see the historical changes in the Volatility Quotient. Here is how the 10-year chart of the VQ% for the S&P 500 is shown in the Stock Analyzer. It is highlighted in the red box.
Another great example of this is Northrop Grumman Corp (NOC). The chart below shows how even in an individual stock, these peaks in VQ can be powerful indicators of significantly higher prices to come.
From 2007 to 2009, the VQ on NOC rose from below 12% to nearly 25% – a gain of over 100%. In October of 2009, VOC triggered a new SSI entry signal at about $38 per share. Today NOC is worth $250 per share – a gain of over 500%.
That’s the kind of gain all of us need to experience at least a few times in our investment lives.
I’ve shown you the long upward climb of Constellation Brands (STZ) several times. What I hadn’t noticed before is how the volatility of STZ peaked after the financial crisis of 2007-2009.
The VQ for STZ in early 2010 was close to 30%. Today, it is 16% … and investors who got in at the original SSI Entry signal more than 3 years ago have been riding the wave higher as the built up VQ-energy has been spent.
Most investors are afraid of volatility. Not me. I relish it.
I relish it because I know that when it comes to understanding and leveraging volatility, I have an edge. I know that there is no sure thing when it comes to investing. I don’t add a false sense of certainty to my thinking. I recognize the fundamental uncertainty of investing and I make the most of it.
Stay tuned to hear more about this new research in the coming weeks and months,