With TradeSmith, There Are No More “Bear Markets”  | BY Keith Kaplan
CEO, TradeSmith |
TradeSmith has grown quite a bit from its humble beginnings. It’s grown so much, in fact, that I’ll go as far as to say that our software has begun to defy something most investors take for granted: bear markets. Before you call that crazy, let me explain what I mean. Most investors would tell you a bear market happens when a major benchmark falls 20% or more. Everyone agrees this is true, including me. Don’t worry, I’m not trying to convince you that bear markets aren’t real. But what I can say is when you use TradeStops, there’s no good reason to suffer bear markets. In fact, if you commit to our tools the way we designed them, you may never experience anything but a bull market for the rest of your investing career. That’s a bold claim, and I’ll unpack it in just a bit. But first, we need to wind back the clock 20 years and show you the key steps we took to solving this huge problem. The Evolution of TradeStops Almost 20 years ago, we began with TradeStops, a simple method for tracking trailing stops in your portfolio. It was useful but limited. And it was breaking a cardinal rule that nobody really knew existed back then. See, every stock and fund is completely different. Therefore, the kind of trailing stop that works on one stock, keeping you in or out at the right times, varies a lot. One example I love to cite is two large-cap stocks, Johnson & Johnson (JNJ) and Tesla (TSLA). You probably don’t need me to tell you that these are not just different companies, but different stocks with very different price action. It would make no sense to hold JNJ through a 50% loss. It’s so stable, a 50% loss would mean something utterly devastating has happened at the company. You’d want a much tighter stop-loss. At the same time, if you committed to sell TSLA every time it fell by 10%, you would never hold it. TSLA constantly goes through 10% drawdowns – and more. So, if you’re just picking and choosing random stop-loss levels, chances are good that what you choose just won’t work. We solved this problem with our Volatility Quotient. This formula takes the unique volatility picture of every stock we track and assigns an appropriate stop-loss level based on that volatility. For JNJ, the current VQ% is 12.5%. If you bought JNJ today, you should accept nothing more than a 12.5% loss on that position. For TSLA, it’s much higher. That stock’s VQ is close to 49%. So, when you own TSLA, you should expect as much as a 49% drawdown as part of the deal. When we developed VQ, we quickly realized that we could do more with it than just stops. We could use VQ to determine the right time to buy stocks, too. Take TSLA. That stock just recently entered what we call the “Green Zone,” which uses VQ to determine entry points. On Oct. 31, TSLA entered the Green Zone at $249.85 per share. Since then, the stock has climbed to about $340. And the current VQ-based stop price is down at $176.56. We also realized that many people won’t want to hold through big losses on stocks with high VQs. So, we implemented a middle ground – a “Yellow Zone” about halfway between a stock’s VQ-based stop and its most recent high. Much like a yellow stoplight, this reading acts like a “caution” signal. When a stock enters the Yellow Zone, you should keep a closer eye on it and consider selling it early if you decide you can’t stomach the volatility. Now that we’ve unpacked that, you might be able to see how I’m able to make such an audacious claim as how I started this essay. How TradeSmith Keeps the Bull Market Rolling There’s an old saying that goes “there’s always a bull market somewhere.” That’s a comforting phrase until you realize how hard it is to find the bull market when all the major benchmarks are in a bear. Think back to 2022. Stocks were well off their 2021 highs, and all the stuff that was working in the previous bull market was losing money fast. But not everything was losing money. In fact, our system pinged several stocks as entering the Green Zone. Take a look at this slide from a recent presentation I gave: 
The top row is all stocks that started to crater in 2022, and the point where our system said to get out. Following our signals helped you avoid a 70% loss in PayPal (PYPL), an 86% loss in RingCentral (RNG), and a 60% loss in Netflix (NFLX). This all came about during a broad-based bear market in the S&P 500, Dow Jones Industrial Average, and Nasdaq 100. Now, look at that second row. At around the same time all these stocks were flashing Red Zone signals, Nine Energy Service (NINE) was flashing a Green Zone signal. That stock ultimately rose 228%, and it’s a similar story with Torm PLC (TRMD), which rose 331%, and Target Hospitality (TH), which rose 622%. These are the “bull markets somewhere” that people wish they knew how to find. Our system can find them. And that’s why TradeStops is so great. Yes, it’s an excellent portfolio management tool. But it’s also a great way to find new opportunities and rotate into them when new Green Zone signals flash. Understand, I’m not so bold as to say nobody using our tools lost any money in the last bear market. We all lost money then, to some extent. That’s just what you sign up for as an investor. What I am saying is… opportunistic investors using our tools won’t have to suffer as bad of a bear market as 99% of investors will. If you are nimble enough and follow our signals, you could ditch all the losers and rotate into the winners. You could’ve, just as one past example, caught the energy stock boom of 2022 before it was on anyone else’s radar. Being out of bubbly tech and into energy early on would’ve made a world of difference in how your 2022 went. It’s entirely possible that a user of our tools would keep most of their wealth intact, and even grow it, while most people lose money. All because of a different way of looking at risk management, which we pioneered with TradeStops. That leads me to one thought that’s been on my mind. We’re always looking to improve our tools, whether it’s TradeStops, or Options360, or any of our newsletter subscriptions. So, if you’re a subscriber or even if you just read this eletter, I’d like you to write me at feedback@TradeSmithDaily.com and tell me what you think about our tools. What would you like to see to make your experience better? Or, if you’re not a subscriber, what’s the thing that would make you join us? My inbox is always open, and I can’t wait to read your thoughts. All the best,  Keith Kaplan
CEO, TradeSmith | 
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