Use TradeStops to Make the Most from Your Investments in Volatile Markets!
By -Edward Lance Lorilla
September 26, 202410 minute read
0
Be prepared for more volatility with TradeSmith's risk management tools.
September 26, 2024
Use TradeStops to Make the Most from Your Investments in Volatile Markets!
The market’s post-rate-cut excitement continued this morning, after a trio of better-than-expected economic data releases sent stocks rallying – right from the opening bell.
If you missed it here’s today’s good news:
Q2 U.S. Gross Domestic Product (GDP) grew at a 3% annual rate, better than the 2.9% forecast.
New orders for durable goods were flat last month, beating the estimated decline of 2.7%.
Initial jobless claims fell to 218,000 last week – down from 222,000 and below forecasts.
Markets move on news more than ever these days. And big event days have the potential to ratchet up market volatility – sending markets running on the back of those moves.
And you’d better get used to it: because from now until Election Day, there are plenty of events on the calendar with potential to move markets. Here’s a handy roadmap of those volatile days to come:
The chart above plots the S&P 500’s daily implied volatility moves between now and the U.S. presidential election. The higher the implied move, the further the stock market is expected to run – either up or down – on that given day.
The chart also notes the scheduled market events and news releases that could contribute to higher volatility readings, annotated in red. You can think of it as a projected volatility calendar and a handy guide to the busy fourth quarter I’ve mentioned in earlier issues.
Based on the pricing data of weekly S&P 500 options, this week has marked a period of relatively low volatility (shown at the far left). Enjoy it – and early next week – while you can.
Because as we enter October, things could change quickly: Next Friday’s jobs report could bring a spike in volatility, thanks to the mixed signals we’ve received from recent employment data. The market will be vulnerable to any disappointing news – and the options market is pricing in a move of +/- 1% from the index as a result.
On Oct. 10, we’ll get the next CPI inflation report – another potential market-mover. Then near the end of the month, the all-important “Magnificent 7” mega-caps will report their quarterly earnings results… which means volatility could spike higher yet again.
The beginning of November brings another jobs report, followed by Election Day itself. Current options pricing implies the market will be busy once the dust settles, and the results are in: The S&P 500 is expected to move up or down by a solid 2.5% on Nov. 6... So, stay tuned.
Prepare for High Volatility with TradeStops
With so much short-term market noise on the horizon, it makes sense to pay close attention to your protective stops – and to keep an especially watchful eye on market trends as we approach the end of this wild election year.
All TradeSmith users with our TradeStops software have access to a powerful suite of risk management tools. With September ending, now is a good time to brush up on how best to use them.
To get an overview of your portfolio’s health, log into your TradeSmith Finance dashboard. From the main menu, navigate to My Portfolio to access your saved or synced investment portfolio, then click on the Positions tab to view all your positions.
Here’s an example view:
Here you can see all your open positions – along with their current Health indicator status and the current Health Stop price, highlighted by the green arrows.
PLEASE NOTE: If you don’t currently have access to our portfolio management tools in your TradeSmith Finance platform – and would like to – call 888-623-0858 to discuss how to add them.
With our positions in front of us, it’s time to review our stops. Let’s start with Eli Lilly & Co. (LLY) right at the top of my example portfolio.
Currently, LLY is in the Health indicator Green Zone, with a current Health indicator stop price of $756.31. That’s comfortably below the latest close of $924.56 – we can feel secure with the 22.24% moat.
Now click on the highlighted symbol icon, LLY, and you’ll get additional details to review in the TradeSmith Stock Analyzer, sorted in tabs for Performance, Alerts, and so on. Let’s focus on the chart in the Position Details tab, as shown below:
Every picture tells a story… and in the picture of this chart, you can see the entire journey of LLY in this hypothetical portfolio, from the time of purchase in early August to its current position today.
Let’s cover the two most important stop prices on this chart, by clicking on the most recent of the blue vertical price bars.
The info box that appears will provide you with LLY’s price details for the period associated with that price bar, along with useful TradeStops price levels you can review at a glance. You’ll see all of the following, listed from top to bottom:
The Health indicator Yellow Zone...
LLY's Health Stop...
LLY's Smart Moving Average (SMA)...
And the Volatility Quotient (VQ) Trailing Stop.
Let’s take a closer look at each of these levels, in order.
Yellow Zone: If LLY stock hits the Yellow Zone price, that means it has corrected about halfway to its listed VQ Trailing Stop from its most recent high. This indicates that you should exercise caution when using the Health Indicator as your stop-loss strategy – but keep in mind that stocks often rebound from the Yellow Zone given time.
Health Stop: Just like a person’s fingerprints, each stock has its own unique Health Trend. The calculations are a bit complex, but the concept is simple: It’s the basis of our Smart Moving Average – the unique trend that best supports the long-term price movement of the security.
As you can see above, LLY remains in the Health Indicator Green Zone. With our example entry price of $793.18, The Health indicator Stop price for LLY is $756.31.
In other words, if LLY shares decline below this level, it means the stock’s trend has turned unhealthy based on historical data. When using the Health Indicator as a stop-loss strategy, this is your exit point.
Smart Moving Average (SMA): The Smart Moving Average is unique to every security. It isn’t a “one-size-fits-all” moving average like the popular 200-day. Instead, this is a TradeSmith indicator we’ve engineered to be the single best moving average when it comes to capturing bounces from the trend, based on the ever-changing volatility of the underlying security.
And as you can see above, the Yellow Zone and SMA levels for LLY are in very close proximity – which means this price level should provide good price support for the stock on any pullback.
Volatility Quotient (VQ) Trailing Stop: The VQ Trailing Stop is our proprietary TradeSmith risk metric. It’s based on several years of historical price data and is continuously updated. Our algorithms calculate the expected move of every security we track to determine the typical range, or amount of room you can give the stock to fluctuate normally.
The VQ is dynamic and updated weekly, to ensure you take the right amount of risk on any trade you make. When it comes to VQ, lower is better – and better means lower risk. Here’s the VQ range we use:
15% or less: Low risk
15% to 30%: Medium risk
30% to 50%: High risk
Above 50%: Sky-high risk
The VQ stop is typically at a different price level than the Health Stop, but that depends on the underlying volatility of the stock compared to its normal movement.
For LLY, the VQ trailing stop is currently $755.90, just slightly below the Health Stop. Notice how the VQ trailing stop rose as LLY stock price rose, since the position was entered into this example portfolio? This dynamic ability to trail the stock price helps you lock in more profits.
While these price levels provide you with plenty of data as-is, TradeSmith subscribers with access to TradeStops have the option of setting their own customized trailing stops on any position. To do this, simply click on the Alerts tab for any open position:
From the Alerts tab, you can set a custom stop at any level you desire below the current stock price.
In this example, I’ve set a custom Trailing Stop for the LLY position, by selecting the appropriate option on the left under the “Add New Alerts” header. By choosing the “Custom %” option, entering a percentage of my choice, then clicking the green Add Alert button, TradeSmith Finance will now alert me if LLY falls 10% below the highest closing price reached since entering the position.
And as the price of LLY shares moves higher, this Trailing Stop will move up along with it. By exploring the other options in the Alerts tab, you can keep as close an eye on your position as you’d like – helping you keep more of your hard-earned gains, even as volatility increases.
Mike Burnick’s Bottom Line: When markets turn volatile, increasing your risk management to safeguard your gains is the best precaution you can take. Our TradeStops tools give you the option to create multiple protective stop alerts based on the stock’s Health trend, a stock’s volatility profile as measured by our VQ algorithm, or even your own customized settings. And you can use these stops in combination with the rest of TradeSmith’s powerful monitoring tools to help you lock in more of your profits, no matter the market conditions.
Good investing,
Mike Burnick Senior Analyst, TradeSmith
P.S. If you're looking to protect your portfolio from adverse market conditions, now's the time to get informed – and get equipped with the tools you need before the market turns against you.
Eric Fry, one of the expert analysts at our corporate partner InvestorPlace, believes there's more than just the usual election-year volatility on the way – and he's just joined up with TradeSmith CEO Keith Kaplan to share his research on the latest of these strong headwinds set to strike the market over the next few months.
Eric insists that the best thing you can do for your money before the year ends is to prepare for anything now – and the powerful tools available with a TradeStops Pro subscription will give you adequate tools to brace yourself for the worst... or the best.
According to expert investor Eric Fry, you have until September 30th to make this imperative step. Hundreds of stocks could soon collapse 50% or more in the coming weeks, and there’s one simple tool that could help you determine an optimal time to sell everything.
