This Data Defies Wall Street “Wisdom”
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There’s an old adage on Wall Street that goes, “buy the dip and sell the rip.”
Intuitively that makes sense. After all, traders are supposed to hunt for bargains… and sell when things get frothy.
While this saying is grounded in good intentions, it isn’t supported by evidence.
TradeSmith is all about finding solid evidence with provable data. And today, we’ll use data to shed valuable light on whether you should follow this piece of Wall Street wisdom.
You see, a new TradeSmith-developed module shows us what to do when stocks put on big winning streaks.
As you’ll learn, history shows that “buying the rip” might make a lot more sense…
And for this prime example, I’m going to use a company that’s getting a lot of A.I. attention: Super Micro Computer (SMCI).
Don’t Sell That RipThe A.I. race has left many investors scratching their heads as they watch a few leaders climb higher seemingly day after day. One of those highfliers is a name I know well — Super Micro Computer (SMCI).
If you aren’t familiar with this ultra-growth semiconductor stock, read this post from a few weeks back. Back in January I revealed how the company announced breathtaking forward guidance that smashed Wall Street estimates.
If you want to see how powerful a beat and raise is for a stock, have a look at the chart of SMCI.
The stock has exploded to the tune of 145% in 2024, with the latest zoom propelled by the awe-inspiring positive outlook:
One look at this chart might have you think buying this stock today is surely a fool’s bet.
That could be true… There’s no telling what’ll happen in the future.
However, when you consider the rare event that’s happening right now, you’ll think again…
A 4-Day Win Streak is No Sell SignalSMCI shares have gained for four consecutive days. That’s a major win streak, and something most investors would look at as a sign of overextended frothiness.
But TradeSmith recently developed a tool to track both consecutive up and down days in stocks. This early-in-development tool lets us visualize when these rare occurrences have happened in the past… and what happened after.
Below details each four-day win streak since 2020, highlighted in green. The most recent streak was last week, on Feb. 8. In total, there’ve been 47 unique signals:
The signals are one thing. What they mean going forward is another thing entirely.
This same module plots the average forward returns when this signal has triggered in the past. When you study SMCI’s data, you’ll find that big four-day rips aren’t a reason to sell…
In fact, history proves those have been bullish trigger-points.
Below details what I mean. When you tally all prior four-day consecutive up days for SMCI, here’s the average forward performance:
- 1 week later, the stock jumps 0.9%
- 2 weeks after, shares climb 3.1%
- 1 month post this signal, gains average 4.2%
- 2 months later, you’re staring at a double-digit rip of 13%
Using data is powerful. It can cut through the noise and emotion that often distracts us.
SMCI may in fact be due for a pause soon, but just because it’s climbed four days in a row, don’t let that be your reason to sell.
The data shows that strategy doesn’t hold water, historically speaking.
Now to be clear, I’m not suggesting you go out and jump into SMCI. This exercise is meant to illustrate how historical perspective can help guide you in uncertain times.
Don’t get hung up on Wall Street cliches. Here at TradeSmith we let the data do the talking. And right now, the data says we shouldn’t let a win streak be reason to fear.
Contributing Editor, TradeSmith Daily