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The market crumbles under the threat of a rate hike… But the TradeSmith gameplan never changes… What it takes to trade like a turtle… Build your watchlist with Jason Bodner’s latest Power Rankings… There’s big gains to be found in “alternative markets”… 

By Michael Salvatore, Editor, TradeSmith Daily


They must just be playing with us at this point.

Late to the party but with a voice a hundred times as loud, more Federal Reserve officials are now starting to suggest that rate hikes, not cuts, are on the table for 2024 if inflation does not get under control.

Here’s Bloomberg: 

New York Fed President John Williams — in response to a question about the central bank resuming rate hikes — said “it’s not my base case.” He also said, however, that “if the data are telling us that we would need higher interest rates to achieve our goals, then we would obviously want to do that.” Williams spoke at a conference in Washington.

Treasury yields — already headed higher after the latest US economic data — subsequently rose further, led by the two-year note’s, which climbed as much as 5 basis points to nearly 4.99%. It peaked this week just over 5%, the highest level since November, after Fed Chair Jerome Powell appeared to endorse the bond market’s recent paring of expectations for interest-rate cuts this year.

If John Williams was playing football, he’d be the quarterback yelling “Hike!” just before getting sacked.

Stocks continued their selloff through Friday, with the S&P 500 crossing into that conservative “risk-off” zone we talked about then.

Just like late last year, climbing Treasury yields are weighing on stock prices. The higher the risk-free return goes, the less attractive stocks become.

So long as there is reason for yields to climb – stubborn inflation – this competition between Treasurys and equities will continue. And the mere mention of interest rates going in a direction that supports Team Treasury will continue to rattle investors’ confidence.

So how should you handle it?

❖ In essence, you need to be more selective…

The stocks you buy have to be high-quality businesses that offer more value than a risk-free rate in a volatile environment.

You have to buy them at opportunistic times.

And you have to be quick to cut small losses before they become big… and similarly, lock in profits while you have them.

Easier said than done. But regular readers know TradeSmith can help in all these areas.

The Business Quality Score (BQS) and Ratings Gauge are perfectly tuned to help you find high-quality businesses no matter what’s happening with inflation and interest rates.

Digging deeper, our Screener and Trade Cycles software will help you find groups of these high-quality stocks in certain sectors… and that have seasonal tailwinds backing them up. (For a demonstration on this, check out the video Lucas Downey and I recently shared.)

And at the core of it all is TradeStops, which syncs with your portfolio to make sure you don’t hold onto losers any longer than you should… and lock in profits with trailing stops.

If I were doomed to live on a proverbial desert island of endless market volatility, these are the things I would bring with me to survive.

TradeSmith designed these tools exactly for times like these.

But let’s say you have a penchant for the short term, and like to trade these ups and downs for what they are – big profit opportunities?

For that kind of trader, I have a story to tell…

❖ 40 years ago, two traders decided to conduct an experiment…

Richard Dennis was an enormously successful futures trader in the early ’80s. He turned an initial stake of $5,000 into over $100 million.

Due to these humble origins, Dennis believed anyone could be taught to trade. His partner, William Eckhardt, disagreed. He believed that Dennis’ talent was a rare gift that couldn’t be replicated.

So to settle the argument, Dennis sought to prove whether anyone with the will and the common sense can learn to trade – latent talent, education, and any other factor be damned.

Together, they posted an ad in The Wall Street Journal inviting any reader to apply to a program to learn to trade. Dennis would provide the funds for them to do it, so long as they passed an initial litmus test of five questions.

Thousands applied, but only 14 made it through. These were the “turtle traders” – named after Dennis’ experience in Singapore, seeing how much more quickly turtles could be raised in captivity than in the wild.

The curriculum was simple. Like many great traders, Dennis relied on rules. Rule No. 1 was “the trend is your friend.” Whenever there was evidence of a trend forming, up or down, Dennis would trade it accordingly.

That evidence would often come in the form of a trading range breakout. When prices consolidate between two levels for a long time, and then escape that channel in either direction, that’s the signal.

For an example, take a look at this chart of bitcoin: 

Bitcoin has been trading generally between a range of about $61,000 and $72,000 since the beginning of March. Using Dennis’ approach, bitcoin would be a buy if it closes above the range, and a short if it closes below the range.

There were some other fundamental principles that should sound familiar to TradeSmith readers: 

1. Look at data, rather than the news feed, for trading ideas.
2. Plan your exit at the same time you plan your entry – both a profit target and a stop loss.
3. Don’t bet more than 2% of your portfolio on any given trade.

Simple enough… but was this really enough to turn a group of amateur, “turtle” traders into masters?

According to one former student, the first two classes of turtle traders were able to make $175 million in only five years. I’d say Dennis proved his point.

Outside of considering this trading range strategy for yourself, the big takeaway here is that these traders followed strict rules.

They didn’t let emotions guide them. They had a plan for the open and the close of every trade. They didn’t over-trade.

And perhaps most impactful of all: They had an experienced trader to guide them.

TradeSmith offers plenty of guidance just like this, even if our traders’ techniques vary. 

• John Jagerson and Wade Hansen make A.I.-driven recommendations in Predictive Alpha.
• William McCanless offers up seasonality and cycles-based ideas in Trade Cycles.
• And Mike Burnick uses TradeSmith’s Probability of Profit algorithms to generate reams of income from the options market in Constant Cash Flow.

But for all these strategies, the three core principles of Dennis’ turtle traders are a common thread. Remember that, and be sure to apply these core ideas, before you put on your next trade.

❖ Love him or hate him, Jim Cramer was dead on when he said “there’s always a bull market somewhere.”

And Jason Bodner’s Power Rankings list is where you can find it.

Jason Bodner, editor of Quantum Edge Pro and TradeSmith Investment Report, doesn’t sweat times of volatility like we’re seeing now.

You see, Jason built out a unique method for finding stocks with the best potential to avoid ugly downturns in the broad market.

This Power Rankings list shows him all the high-quality stocks showing signs of major Wall Street institutional buying – no matter if the market is going up or down. In addition, it shows a number of low-quality stocks with of the strongest sell signals.

It’s like having a metal detector at the beach that tells you exactly where to find the gold earrings and avoid the costume jewelry.

As we showed you on Thursday, certain stocks do have a history of moving higher despite the broad trend. Often, those stocks are the ones the big money targets.

But just as helpful is the overall trend in big money itself.

Using another invention of his, Jason is able to show if the hundreds of billions in capital controlled by Wall Street is going “risk on” or “risk off.” He calls it the Big Money Index.

Here’s the latest reading: 

The yellow line above is the number of Big Money buy signals flagged by Jason’s system. The blue line in the S&P 500. And the red and green lines are thresholds where the market is overbought or oversold, respectively.

As you can see, the BMI line is in free fall, and started to really pick up speed just as stocks plateaued a couple weeks ago.

So, the Big Money is going risk-off. But take a look at what the line did back in October, when it went oversold.

That proved to be a great time to buy – just before the S&P 500 ripped over 25% higher.

As the BMI gets closer to oversold, it’s time to start putting together a buy list. And that brings me back to Jason’s Power Rankings.

Jason’s Quantum Edge Pro subscribers get first access to this list when it releases every Monday. But with Jason’s permission, and because of the slide in stock prices over the past few sessions, I’m sharing last week’s list with you today. Here it is: 

Note all the fossil fuel and energy stocks in this list. The tide is certainly shifting.

❖ Wrapping up, a major event completed over the weekend…

As we’ve been telling you for about six months now, the bitcoin halving is a huge tailwind for crypto prices.

The halving is when the incoming supply of bitcoin that miners receive goes down by half.

Think about how rare that is. Most financial units of account increase the supply – not decrease it. We see that all the time in equities (with share dilution), in debt (with Treasury auctions), and in currencies (with money printing).

Yet in bitcoin, the road to its fixed-supply cap of 21 million slows down every few years with slower issuance. That’s a purely disinflationary asset – an incredibly rare quality that not even gold can boast.

If that’s not enough to convince you that bitcoin is worth buying, then consider the history of what happens after these events.

Every halving event thus far has sparked a bull run in bitcoin and other crypto assets. This chart of bitcoin shows it clearly. 

And in case you weren’t aware, the fourth bitcoin halving completed Friday evening.

This is a buy signal worth paying attention to, whether you love or hate the digital asset trend.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily