How You'll Know When to Sell  | BY Keith Kaplan
CEO, TradeSmith |
Like you, I went into Saturday wondering whether we'd start this week with an epic bounce from Friday's selloff... or a second gut punch.
Well, we got the punch. Only it was armed with brass knuckles and aimed squarely at our jaw.
The S&P 500 fell 3.5% to start the week. The Nasdaq 100 fell 3%. The CBOE Volatility Index (VIX) posted its third-highest reading of all time. (Yes, this is the third-highest VIX reading ever; only the Great Financial Crisis and the COVID crash were worse.)
Oil, natural gas, precious metals, soft commodities, the U.S. dollar – just about everything fell. You don't even want to look at the crypto market.
This is exceptional volatility. It's the kind of market that can easily lead to bad, impulsive decisions from traders under pressure.
So I'm writing today to help you keep a cool head... To show you that Monday's events were NOT a complete risk-off signal...
And to promise you that, when we DO see something in our data that's truly alarming and worthy of your attention, we won't keep it to ourselves – whether you're a paying subscriber or not.
Let me explain... The Only Selloff Factors We Care About We don't focus on the "why" of market selloffs so much as the "what" and the "when."
Answering precisely why the market is selling off is futile. For one, conditions are constantly changing. The reason evolves from one moment to the next. And two, understanding the reasons behind a big move won't make it any less painful or, in all likelihood, change your strategy all that much.
Unless you're a "yen carry" trader, you probably don't much care it's the reason why your portfolio is down.
Same goes for unemployment numbers or too-slow rate cuts from the Federal Reserve.
These are distractions from the only signal that matters – the price action. That's the "what" and "when" so perfectly shown in every chart.
TradeSmith is a data-driven company. We let the data do the talking, not the headlines. (At the same time, we don't keep our head in the sand about the macro aspects of market moves. We just don't let them predominantly guide our decision making.)
We rely on our battle-tested algorithms to help us understand what could happen next.
And right now, in the heat of battle, none of our algorithms are screaming "sell."
Take a look at this chart of the S&P 500 over the last three months. See the red line inching up from the bottom left of that chart?
That's our Red Zone. It's the official sell signal that powers our flagship alert software TradeStops, determined by our proprietary Volatility Quotient or VQ.
Based on each asset's historical volatility, VQ is the amount of "normal" volatility we can expect before we can be fully confident a trend has shifted.
As you can see, even after the recent decline, the current S&P 500 level (blue line) is a healthy distance from our Red Zone: 
Only once we reach the Red Zone will markets move decidedly into risk-off territory.
We're not there yet, and we might not get there.
But we should note on Monday morning, the S&P 500 briefly entered the Yellow Zone. That's the halfway point between the recent market high and the Red Zone. It means, like a yellow traffic light, we should be cautious.
Currently, only two of the 12 markets we track are in the Red Zone: - The Japanese large caps (Nikkei 225), which fell nearly 6% in the last session and entered the Red Zone three days ago...
- And the small-cap S&P 600 benchmark, which has been stuck in the Red Zone since May 2022.
So, in other words... panic-selling now would be entirely premature.
In fact, you should even consider doing the opposite and buying the dip.
Here's why...
The S&P 500 entered the Yellow Zone not too long ago, back in late October 2023: 
At the time, headlines were screaming about high Treasury yields weighing on stocks. The 10-year U.S. Treasury yield was over 5%. Traders were flocking to the high yields as a cover from falling stock prices.
As a result, the S&P 500 dipped into the Yellow Zone on Oct. 25 – just like it's doing today. And that was a nerve-wracking moment.
But if you'd sold, you would've missed out on gains of more than 23%... and that's taking into account this week's bloodbath.
Let's turn back the clock a bit further. Here's a chart of the last time volatility was this high.
The S&P 500 entered the Red Zone on Feb. 27, 2020, coinciding with the "bearseye" signal I showed you last week: 
From that day's high to the bottom about two weeks later, the S&P 500 fell another 22%.
Once an asset falls into the Red Zone, our system needs to recalculate the VQ number to account for the surge in recent volatility. Once things stabilize, and the asset in question rises a certain threshold from the bottom, we have a new buy signal and a new VQ level.
Back in the pandemic, that happened on March 27. The S&P 500 triggered an Entry signal into the Green Zone and flashed a "bullseye" signal along with it. It would stay in the Green Zone, riding markets higher – more than 58% higher – until May 9, 2022, when we got the next "bearseye" signaling the trend had changed again: 
After that signal, markets waffled for a full year before we got another Entry signal into the new Green Zone – where it's been ever since.
I say all this to demonstrate two things: - Our system is really good at calling major downtrends and bear markets, along with helping you sidestep them.
- The signals are rare, and clear as day.
If you've just started following TradeSmith or you're not a subscriber to our software, you might be worried that you won't get these key signals on the major benchmarks when you need them most.
Well, don't be.
We could easily keep these signals behind the curtain and reserve them for our paying members. But that just doesn't sit right with us.
For everyone but the most cutthroat top earners of Wall Street, investing is not a competition. It's an inherently optimistic act where you believe that, by exchanging your hard-earned money for a piece of a company, both you and that company can get ahead and ideally do some good for the world.
In that spirit, it would be monstrous of us not to alert the hundreds of thousands of folks that read this newsletter when our data reveals something significant has happened in the stock market.
That's why I can, do, and will continue to alert ALL our subscribers whenever we see ugly price action that threatens your wealth.
I trust and follow our market signals with the wealth I've spent so much time and effort to build. It's saved me countless times from bad markets and irrational decisions.
I want to make sure we can help you avoid the same thing.
To close – take comfort in the fact there's no major sell signal flashing right now. There's a chance this "yen carry trade" business blows over and things settle down.
But you don't have to struggle with the uncertainty, either. If a major U.S. market enters the Red Zone, we'll let you know. If we jump back to the Green Zone, we'll tell you that, too.
And we'll keep sharing our best ideas for all kinds of markets here in TradeSmith Daily all along the way.
All the best,   Keith Kaplan
CEO, TradeSmith | 
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