How to Trade “The Two-Day Beatdown”

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A two-day decline like this sets up a killer short-term return… Here are your top targets… NVDA’s downswing and when to lock in profits… The small-cap trend is here to stay… The money flows confirm it… How Keith Kaplan made a better stock chart…

❖ The recent large-cap exodus got us thinking…

The last two weeks were marked by a stunning rotation from large-cap tech to small-caps. In other words, the favorite trade of the past year and a half just gave way to one of the most hated sectors of the high-interest-rate era.

In what felt like an instant, the small-cap Russell 2000 staged a comeback that threatened to unseat the Nasdaq 100’s year-to-date return.

That rotation has since cooled. QQQ is still sliding, and IWM is consolidating the recent breakout.

Regardless, the selling in large-cap tech is getting pretty extreme.

So, in addition to recommending you gain some small-cap exposure, we felt it prudent to look through the Nasdaq 100 and see which stocks are set to bounce back the strongest…

❖ And we came up with a “two-day beatdown” strategy…

We went back and looked at all Nasdaq 100 stocks over the last 20 years. We wanted to isolate the times that one of the stocks fell by any amount one day… and then fell by 2% or more the next.

The theory is this kind of one-two punch beatdown makes for a short-term oversold condition.

Then, we assumed we’ll hold the stock for 21 trading days afterward – or about a calendar month.

Screening through the list helps us find the stocks that will bounce, if you’ll allow me to paraphrase an old favorite saying, “like fresh tennis balls… and not like rotten eggs.”

We’ve eliminated stocks where one big grand slam overshadows a stream of losses. The win rate should also be no less than 65%. And we only want to look at stocks that flashed this signal more than a few times.

Here’s what we uncovered…

Symbol	Trades	Avg. Trade	Win Rate
VRSK	44	3.05%	72.70%
META	76	4.01%	71.10%
BKNG	117	4.66%	68.40%
LIN	25	3.50%	68.00%
AVGO	89	3.89%	67.40%
FANG	78	4.09%	66.70%

If you’re looking for a high win rate, high number of cases, and high returns, look no further than Meta Platforms (META). 71% of the times we see a two-day beatdown in the mega-tech formerly known as Facebook, it rises 4% over the next 21 trading days.

Booking Holdings (BKNG) – a stock we’ve highlighted in these pages– puts up an impressive 4.6% return more than 68% of the time. And it’s seen this signal occur 117 times in the last 20 years.

Linde PLC (LIN) stuck out to me, too. This signal has occurred just 25 times. But more than two-thirds of the time it happens, the stock returns 3.5%.

So, there’s your short-term buy list for tech stocks that get dragged through a bit of mud.

❖ But one stock is doing a whole lot worse than that…

Nvidia (NVDA) – at one point viewed as the most important stock on earth – has taken the worst of the large-cap dump.

As I write early Tuesday afternoon, the stock is down almost 6%… and it’s now down nearly 23% from its all-time high set just a month ago on June 18.

You might recall a couple weeks back, we declared it “Profit-Taking Season.” That was for a simple reason: seasonality. The past 74 years of market data has shown that the unusually strong first half of July would soon give way to a washout that could last until the election.

As we wrote then:

Smack between the longer-term bearish trend for stocks between May and October, the first half of July is an unusual period of seasonal strength.

Take a look at our TradeSmith seasonality chart of the S&P 500 covering 74 years of data:

Since 1950, today, July 17, through the end of October has been where we see the worst of the seasonal trend. Markets have shaved off about a quarter percent on average over the last 74 years within this timespan, and just over half of the time.

But look just a little further back, from June 25 to now:

70% of the time going back 74 years, markets have returned almost 1.5% on average during this short span.

What’s the takeaway?

The last few weeks of market returns have been excellent… but it’s time to take some chips off the table… and prepare for a new bout of volatility to strike.

Getting back to NVDA, it’s down more than 17% since we wrote those words. The Nasdaq 100, more broadly, is down 8%.

Following our advice and “taking some chips off the table” was clearly the right move.

But when will we see this correction turn into a true “rush for the exits”?

If you ask us, it’s when we see NVDA drop another $4 to $101.16 per share, which is when it’ll cross over from the TradeSmith Green Zone to the Yellow Zone.

The last time that happened was back in April 2022. From that moment to the trough a couple of months later, NVDA fell by more than half, from a split-adjusted $26 to $11 per share.

The Yellow Zone works just like a traffic light. It’s a warning that prices have fallen to a cautionary level.

• Sometimes, prices recover out of the Yellow Zone and enter the Green Zone – a great sign. That’s the equivalent of timing it just right, speeding up a bit, and crossing the pedestrian crosswalk before the light turns red.
• Sometimes, though, you’re too far away to make it. And the best move is to slow down (aka, trim some risk) before you’re forced to stop.

From a valuation perspective, NVDA is still pretty richly valued at 61.75 times earnings.

A lot of assumptions are being made that its dominance as a chip provider for the AI trend is impenetrable, including by NVDA itself. But should AI enter Gartner’s “trough of disillusionment” part of the hype cycle, things could get ugly for what was very recently the world’s most valuable company by market cap.

Source: Gartner

Our take: if you haven’t already taken some chips off the big-tech table, now’s your next best chance. The overwhelming trend points to more volatility heading into the election. De-risking is the prudent move.

❖ As for where to deploy those profits instead, just ask the Big Money…

While we should expect volatility to pick up and large-caps to face pressure in the months to come, we can’t forget the words of the immortal bard Jim Cramer – “there’s always a bull market somewhere.”

Well, there sure is a bull market in small-caps. And judging by the money flows, it’s a serious one.

We showed you on Sunday how key money flows are to understanding trends. Jonathan Rose is an expert at using those flows to trade the short term. But TradeSmith’s own Jason Bodner is the master of using them to pick stocks.

Here’s Jason’s analysis of the small-cap money-flow rotation that he shared with his Quantum Edge Pro readers this week:

The Mag Seven have each declined 10.3% on average since Nasdaq’s recent peak July 10. Given their outsized influence right now, 75% of Nasdaq’s wipeout is from those seven stocks. That’s out of whack.

This massive dispersion is causing a lot of heartburn at the moment, but it’s bullish for the future. I expect the highest-quality large tech stocks to regain their footing. Many of these lead the market and the tech revolution right now, and the best of the best will still make good money over time.

And this is a great sign for smaller stocks, which are our focus here in Quantum Edge Pro. We can see the small-cap juice below when looking at Big Money buying (green bars) and selling (red bars) on the Russell 2000 ETF (IWM), which has popped about 10.5%.

Source: MAPsignals.com

Notice, too, those recent big green bars that denote Big Money buys. We’ve had some of the biggest buying since late last year, and guess where it’s going? Since the Nasdaq’s peak on July 10, 85.5%of Big Money buy signals have been in stocks valued under $50 billion.

Source: MAPsignals.com

All of this buying in smaller companies has lifted the Big Money Index (BMI) from its recent low of 41.8 on July 2 to its current reading of 61.7. That means 61.7% of all Big Money signals are buys over the last 25 days. It’s a neutral reading, but a rising BMI means rising money flows, and that has to be a good sign.

For months, massive amounts of money flowed into large-cap tech. Now, the tide has reversed and money is flowing out of big tech and into smaller stocks. This “catch-up trade” means new leadership can emerge, which should be great for our stocks.

Jason’s subscribers couldn’t be better set up for this moment. The Big Money is flowing into exactly the class of stocks his system uncovers. And as is typical, they’re rushing into quality – another hallmark of the Quantum Edge system.

Should small-caps take the lead – and it’s looking like they will – you’ll want someone like Jason in your corner. Go here to learn more about getting access to his system and ideas.

❖ To wrap up, look for a special dispatch from TradeSmith CEO Keith Kaplan this afternoon…

Keith, if you didn’t already know, is an extremely inventive person. When he came to TradeSmith, our only product was TradeStops, and he immediately saw the potential to deliver many more. He’s the reason TradeSmith grew into the market-analytics machine that it is today.

You might be aware that TradeSmith is part of the larger MarketWise empire, which is helmed by industry legend Porter Stansberry.

And Porter, after seeing how our Trade360 tool would’ve improved the long-term portfolios from the likes of Warren Buffett, David Einhorn, Bill Ackman, and even himself… he went on the record to say that everyone in the MarketWise network should be using it.

Keith and Porter recently sat down for a free webinar about Trade360. Apart from being an illuminating discussion on the market before us today, it highlights how powerful these tools are, and why they’re so important for everyday investors to take advantage of.

As you’ll see, these tools can tell you with supreme confidence the precise level that any bull market will end. That alone gives you a massive edge whether you’re a trader or a long-term investor.

You can check out that conversation here. And stay tuned for a special edition of TradeSmith Daily out later today which shows how our charts arm investors with way more useful information than the ones 99% of investors check every day – at a quick glance.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith