Stocks Fell 10% the Last Time This Happened

By TradeSmith Research Team

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What this rare outperformance means… Costco sells out of gold and silver… How to boost the dividend of any company… Finding “harmony stocks” with TradeSmith’s elite tools…

By Michael Salvatore, Editor, TradeSmith Daily

It’s helpful to think of markets, on the whole, as simply an endless stream of decisions made by ever-flawed human beings.

These decisions are part emotional, part rational… never just one or the other… and always uncertain.

Nobody can know the future. Yet, with every buy or sell decision we make, we do our best to try predicting it anyway.

These base functions are what make a market. But to break free from the masses and find an edge, we must dive deeper… with data.

With data driving our analysis, we can find the hidden dynamics some traders aren’t even aware they’re participating in… giving us a clue of what might come next.

Take, for example, the relative performance of energy stocks (XLE) and the S&P 500 (SPY):

When this chart goes up, energy stocks are outperforming the S&P 500. As you can see, that’s happening now. But this story runs all the way back to November 2022.

Back then, energy stocks began a downtrend that would take them from a ratio of about 0.25 of the S&P 500 down to 0.17. That corresponded with a strong S&P 500 rally, as the Magnificent 7 and A.I. took over. (I’ve marked trend changes with vertical dashed lines.)

In August 2023, the downtrend (first solid black line) broke. Energy stocks surged from those lows until late October, relative to the S&P, all the way back to 0.21. You might remember this as a time when the S&P 500 started to buckle. Between the second and third dashed vertical lines on this chart, the S&P 500 lost over 10%.

The energy trade lost steam again in October. That was about the time stocks bottomed. Energy underperformed for several months.

What do we see today? Not only has this chart retested the former resistance line stretching all the way back to November 2022 as support… It’s broken and retested the resistance line from October. AND we’ve seen a positive divergence on the relative strength index (RSI) momentum indicator (purple shaded section) since late 2023.

Energy stocks are beating the S&P 500 right now. As we’ve come to understand from the prolonged energy outperformance throughout 2022 and in summer of 2023, that’s risk-off behavior.

The dynamic becomes crystal clear when we clean this chart up and zoom out. Here’s the XLE/SPY ratio (blue) vs. just SPY. It’s a mirror:

Many traders don’t even realize that energy stock outperformance is a warning sign. Even the ones that are positioned well for it.

Right now, you want to be cautious buying stocks outside the energy sector. There’s a strong correlation of their outperformance — which we’re seeing — and broad stock market declines.

❖ Costco is a great barometer for consumer behavior…

And right now, consumers are waking up to the value of gold and silver.

The mainstream media is scoffing at this, as evidenced by this laughably misinformed, attention-economy-driven headline from CNBC:

Everyone who buys gold and silver to protect their wealth from the erosion of the fiat currency system is a doomsday prepper? And buying long-term food and water stores means the same?

Sounds less like a condemnation and more like a badge of honor to these ears.

That’s all the MSM bashing I’ll do today. The real story here is that Costco (COST) has dialed in on a powerful trend emerging in its middle- and upper-middle-class shoppers. (A study from Numerator found the average Costco shopper earns $125,000 a year.)

Costco’s gold bullion bars sold out when they first introduced them last year, priced at $2,000 and limited to two per customer. It drove $100 million in revenue.

Now, they’ve introduced silver coins — Canadian Maple Leafs going for $680 per roll of 25. Limit five per customer.

To us here in TradeSmith Daily, this says just as much about the earned skepticism of American consumers toward the U.S. dollar after COVID… and the upswing in precious metals prices… as it does about Costco’s excellent business.

The latest earnings report showed COST grew net income at nearly 19% year-over-year… grew net profit margins at 12.5%… and grew revenues at nearly 6%.

It’s worth noting that Costco sports a trifecta of bull signs in TradeSmith’s indicators. It holds a commendable Business Quality Score of 87, putting it in the upper crust of outstanding businesses. It gets a Strong Bullish 90 on the Ratings by TradeSmith gauge. And it’s been in the Green Zone for the past 8 months.

COST seems like a great buy, especially as it’s off over 7% from its all-time highs.

It may face a little more heat if the broad market sells off, but its status as a rock-solid staples stock should mean it loses less than high-risk discretionary peers.

❖ Mike Burnick shared more about his “dividend booster” strategy with readers of Inside TradeSmith

Inside TradeSmith is a premium twice-weekly highlight of TradeSmith’s best features and actionable ideas to take advantage of them.

Recently, Mike talked up the merits of using TradeSmith’s tools to boost your income on dividend-paying stocks so they easily beat the returns of money market funds.

Here’s Mike:

About a year ago TradeSmith began sending folks a Constant Cash Flow email every single day around noon. In this email there’s an exact stock listed, plus a specific option on the stock that you can sell to earn immediate cash income deposited straight to your broker account.

We just celebrated our one-year anniversary and so far, Constant Cash Flow has successfully closed out 329 winning trades out of 332 total (and counting). That adds up to an impressive 99% win rate!

Each email shows you exactly how easy it is to earn an upfront cash yield of about 3%, which is our average return on margin.

Granted, 3% may still not sound like much with money-market accounts paying 4% annually. But remember, it’s a 3% return on your money per trade, not per year.

And the average holding period of each of these trades is only about 20 days, roughly three weeks. That could easily add up to potential cash yields of 50% or more compounded over a full year’s worth of these easy trades.

Mike also shared a recent Constant Cash Flow put option trade on META, which paid out $50 per contract in exchange for promising to buy META stock if it falls 21% by April 5.

If that sounds like pretty good odds, you’re right. The Probability of Profit algorithm says there’s just a 16% chance of that happening, meaning you’d have 84% odds of keeping the cash paid for selling the put scot-free, and moving on to the next trade.

I urge anyone who’s looking for quick and active income from the options market to check out Constant Cash Flow. It’s an incredible strategy for boosting your income payouts on high-quality stocks already paying dividends.

Think about all the steady-eddy, dividend-paying stocks you own. They don’t move much, right?

Now, imagine getting continual, extra cash payout opportunities on these stalwart, low-volatility names? And a precise analytical framework for every such opportunity, showing you the risks and rewards?

That’s what Constant Cash Flow promises.

And in case you were wondering — every paid TradeSmith subscription, including Constant Cash Flow, comes with a free subscription to Inside TradeSmith. With it, you get a taste of everything TradeSmith has to offer, from screeners to portfolio management to the tools used by every TradeSmith analyst, twice a week.

❖ And there’s plenty more TradeSmith has to offer…

Remember what I said earlier about diving deeper with data?

In a volatile and unpredictable market, it’s important to back every move you make with high-quality data and elite metrics.

TradeSmith offers plenty of different ways to slice and dice the market, filtering out everything but the best of the best opportunities. Once again, Mike Burnick shared an ingenious way to do this in Inside TradeSmith.

Take a look at this screenshot of TradeSmith’s Screener tool:

With the Screener, you can bring all of TradeSmith’s various tools together to find stocks in specific markets, of certain quality, in strong uptrends (or downtrends), and so much more.

The base Screener is available with Ideas by TradeSmith, as is the Markets filter. The Health Status and Trend are part of TradeStops by TradeSmith… the Cycle Period, Conviction Level, and Turn Area, all part of Trade Cycles… the Business Quality Score, part of Ratings by TradeSmith… and Jason Bodner’s Quantum Score, part of both TradeSmith Investment Report and Quantum Edge Pro.

The result of these filters is a list of high-quality U.S. stocks that aren’t in a downtrend… are set to experience a cyclical surge higher, with high conviction from our algorithms… and with evidence from Jason Bodner’s system that major Wall Street institutions are taking part in the trade. (Mike shared the results with Inside TradeSmith readers, but out of respect for them, I won’t share the list here.)

In other words, it’s a confluence of factors leading you to the best buys in the market today… And in our humble opinion, the best harmony since Brian Wilson and The Beach Boys unleashed Pet Sounds in ’66.

As a TradeSmith Platinum member, you have unlimited access to all of these tools, and many more.

With them, you don’t have to get caught flat-footed if this market sells off. You don’t have to rely on mainstream media headlines to give you the story after the big money has already been made. And you’ll never settle for mediocre returns in a market that can offer so much more.

It all starts in your TradeSmith Finance dashboard. Go right here to get started, and start trading with our best-in-class analytics backing you up.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily