A Rare “Bearseye” Signal in Small-Caps

BY KEITH KAPLAN CEO, TRADESMITH

This year, TradeSmith celebrates its 20th birthday helping investors thrive in bull markets – and, most importantly, navigate the heavily volatile periods (like this one!)

Looking back, it’s hard to even comprehend how much we’ve grown… Especially since we do so much more than your standard financial research firm.

Don’t get me wrong: We lead in this area, with the best quality research and editorial in the business. The data-driven insights from Mike Burnick, William McCanless, John Jagerson, Wade Hansen, Lucas Downey, and Michael Salvatore are all world-class, and I stand by them all.

But where we really stand apart is as a software platform…

Going all the way back to our humble beginnings in 2005, with a simple spreadsheet designed to track trailing stops on stocks… Today we’ve have grown into a leading financial software provider for DIY investors.

And we just keep getting better. There are a TON of product and user-experience upgrades coming down the pike all year long...

Plus, a couple major expansions coming later this month, which I’ll talk a little bit about today.

With each milestone at TradeSmith came a new way for our members to analyze the markets and manage their portfolios.

Today, we’ll take a quick walk through a few of those – and show you the important signal those same tools are turning up now.

2005: TradeStops and the Beginnings of TradeSmith

Back in 2005, we debuted TradeStops. It’s likely that out of all our offerings, this is what you’re most familiar with.

Using our specialized Volatility Quotient (VQ), TradeStops optimizes your portfolio by giving you the precise levels to buy and sell a specific stock, ETF, or other asset (like market indexes) based on its individual volatility history.

Many investors like to set arbitrary stops of 20%, 50%, etc. This kind of strategy isn’t really a strategy at all – because you’re just guessing whether that’s the right time to get out of any particular stock.

Our software uniquely uses data to determine the optimal stop for you to use so that you never stay in a bad trade too long and lock in profits more often.

As it turns out, today’s a perfect day to bring up TradeStops and VQ.

We just saw a significant breakdown in a major S&P index that triggered a “bearseye.”

This rare signal is powered by the same algorithms that drive TradeStops. It happens when at least 40% of the stocks in a major market index enter our Red Zone – what we consider to be the level you must sell at to avoid further losses. At the same time, the index itself must enter the Red Zone as well.

That’s exactly what just happened with the S&P SmallCap 600 index (SML).

On the far right of the chart below, you can see that yesterday (March 11), that bearseye signal triggered on the S&P 600 small-cap index.

The last time that happened was just before the 2022 bear market. Before that, the pandemic. And before that, we were actually dealing with tariff uncertainty again in 2018… right before the worst December since the Great Financial Crisis:

We aren’t seeing bearseye signals in the other major indices yet.

But we should be aware that all the other main U.S. benchmarks have entered into the Yellow Zone – what we could consider a caution signal, or a sign of a significant short-term correction:

We want to keep a close eye on the rest. The S&P MidCap 400 index (MID) has 46% of stocks in the Red Zone right now. And the S&P 500 (SPX) is just under 40%.

If both those benchmarks enter the Red Zone, measured by drops of 15.7% and 13.1% drops from the highs, respectively, we’ll get bearseye signals there, too.

Uncertainty clouds the air right now, making it very difficult to hold your conviction with stocks. But that’s what makes this reminder about how VQ works so important.

Our testing shows that following our stop-out signals and especially our bearseye and bullseye signals makes a significant difference.

On the S&P 500, we’ve seen 17 bearseye signals since 1968.

Assuming you stayed out of stocks completely from the moment that signal hit and entered when we get the next bullseye signal (the reverse), then you avoided losses 11 out of those 17 times. On average, the market dropped another -12.5% when it fell, and -5.6% across all cases.

• On the October 1987 bearseye, the S&P 500 fell -16.2% before triggering a new bullseye signal.
• With the November 2007 bearseye, the market went on to drop 6% by March 2009 (when the market finally began to recover from the crisis).
• And the last time this bearseye appeared – February 2020 – we fell 24.3% by the March trough.

That clearly tells me that, more often than not, heeding a bearseye signal will save you money and frustration.

And as I’ve promised many times in the past, we’ll be shouting from the rooftops if and when we see more bearseye signals hit the tape. So, be on the lookout.

2018: Ideas by TradeSmith and a New Way to Screen

Back in 2018, we introduced Ideas by TradeSmith. This was our first crack at developing unique trading strategies that our users could automatically receive alerts for so they could trade them.

Ideas has a ton of different strategies that we’ve added over the years. But one of them, which we just added a few weeks ago, is perfectly for this moment.

This is our Snapback Strategy, which targets individual stocks in steep declines. The downside momentum must be significant, and the stock itself must already be at a three-month low.

With our Ideas software, we can run a screen for stocks that recently triggered this pattern in the current four benchmarks that are still in correction territory – the S&P 500, Dow 30, Nasdaq 100, and mid-cap S&P 400…

And here are the results:

There are five live Snapback signals right now, and all of them fired in the last five days.

Let’s zoom in on the only stock not in the Red Zone – language learning app Duolingo (DUOL).

DUOL’s Snapback signal triggered as of Monday’s closing price around $276. The average 21-day return after this signal, counting wins and losses, is just under 16%. And four out of every five trades on this signal were positive:

If you think stocks, namely growth stocks, are going to recover here, this setup may well be worth looking at.

2022: Jason Bodner’s Quantum Edge Pro

In 2022, we brought on Jason Bodner, growth-investing extraordinaire and former Wall Street dealmaker for Cantor Fitzgerald.

Jason quickly learned the power of big institutional money flows brokering deals worth hundreds of millions of dollars. He knows all the signs to look for.

Using an advanced algorithm he designed himself, Jason ranks thousands of stocks based on select criteria. The top ones are must-buy names. And no matter what the broad market is doing, the big money is flowing somewhere.

In 2022, we brought Jason on not just to share his insights with our subscribers, as he does in Quantum Edge Pro and TradeSmith Investment Report… but also to give our subscribers access to his system.

On our software platform, TradeSmith Finance, users can enter any stock they like and see how Jason’s system scores it. 

Here’s DUOL, for example, which ranks well on Fundamentals but is suffering on Technicals due to the recent pullback:

But another cool thing is our software tools interact with each other. This was something we worked super hard to accomplish. 

For example, we can use Jason’s Quantum Score in the TradeSmith Screener to find quality stocks that are still in the Green Zone:

Scores between 60 and 85 are considered the “goldilocks” buys – not too hot and not too cold.

Sorting by Quantum Score, we can see five names spring to the top – all of which have held their Green Zone status for a long time, despite the recent volatility:

Note also that all these stocks are up over the past month. This is a great way to focus your attention on what’s working in the U.S. markets.

2025 and Beyond: The Biggest Expansion to TradeSmith Yet

What I’ve shown you today is really just a taste of what we offer at TradeSmith.

Our dedicated users know all about the income-producing power of our Constant Cash Flow algorithm. The clear view they can get on any options trade they’re considering, thanks to Options360. The Risk Rebalancer software, which automatically recommends a way to rebalance your portfolio for optimal health.

And that’s just a few more of dozens of tools we’ve integrated over the years.

TradeSmith has been growing exponentially over the past few years.

And this year, it’s set to grow at the fastest pace we’ve ever seen.

I can’t reveal too much about our next move right now.

But what I can say is that we’ve recently joined forces with three major figures in the financial research space. Figures you’re likely familiar with if you’ve followed along with us here at TradeSmith.

One of them is a master trader who – with his years of hedge-fund experience and specialty in market momentum – has been guiding his readers through bull and bear markets with quick-hit multiply-your-money opportunities for decades.

And another is a research team who boasts unmatched access to investor sentiment data, using it to gain an edge on both short- and long-term moves as well as unstoppable consumer trends.

We’re bringing these forces aboard with us as we speak. In time, we’ll integrate their systems into our software platform as well.

It’s really the ultimate demonstration of what we do at TradeSmith. We bring you the best minds in the business. And then we quantify those minds with tools you can use yourself – as much as you like, and whenever you want – to help manage your investments.

And yes, for all our Platinum subscribers out there, who have paid to receive everything we publish – you will get all of this added to your subscription for 100% free.

I can’t wait to share more about this with you. It’s easily the biggest expansion to the TradeSmith business since we began introducing new software products in 2018.

Stay tuned right here to TradeSmith Daily for more.

All the best,

Keith Kaplan
CEO, TradeSmith