Four Weeks of Pain = One Major Buy Signal

Plus, what the dead heat election means for stocks… [TradeSmith Daily logo] [TradeSmith Daily logo] August 12, 2024 What a difference three weeks can make in an all-timer of an election cycle... The biggest economic difference between a Trump and Harris presidency... These two stocks shrugged off the market decline... What they could do going forward... Why four down weeks might be the ultimate “buy the dip” signal... By Michael Salvatore, Editor, TradeSmith Daily Three weeks ago, anyone with even a pinky finger on the pulse of the U.S. presidential election was saying that Donald Trump was a shoe-in for another four years. He’d just survived an assassination attempt – and looked triumphant doing it. Biden caught COVID and ceased campaigning at a key moment. And all this came mere weeks after a disastrous debate performance threw the Democrats into disarray and infighting. Then came the “hot swap.” Joe Biden stepped down, Kamala Harris stepped up, and the groundswell ever since has caught Wall Street off guard. Just take a look at the latest betting odds for the U.S. presidential election from RealClearPolitics: For the first time since April, Donald Trump is no longer the favorite to win the U.S. presidential election. Now, it’s still a toss-up, with Harris at 50.4% and Trump chasing just behind with 48.1% odds of winning. But that means the biggest investment implications of a Trump term – a dominating rally in small-caps – is now just as much of a toss-up too. Just take a look at this chart of the iShares Russell 2000 ETF (IWM) compared to the SPDR S&P 500 ETF (SPY) and the Invesco QQQ Trust (QQQ) since the start of July: Small caps are still outperforming for now. But they took a huge wallop from last week’s volatility, as fears of a recession combined with a big leverage event took their toll on the riskiest side of the market. Note how QQQ shows that the Nasdaq 100 has gone from outperforming both large- and small-caps in early July to vastly underperforming them now. In our view, small-caps could continue to retrace if Harris’ election odds keep rising higher. The biggest reason why? Taxes. Trump has said he would reduce the corporate tax rate further, dropping it from 21% down to 15%. Meanwhile, Harris has said she would reinstate the 35% corporate tax rate – the same rate that was in place before Trump signed the Tax Cuts and Jobs Act in 2017. This would have a huge impact on the way public companies deal with shareholders. Since the 2017 tax cuts were put into place, companies ramped up share buyback programs and dividends. If those same companies face a tax burden that’s 66% higher than what they’ve experienced since 2017, they’ll have to rethink those efforts – and fast. For small-caps, higher taxes would offset a lot of the potential relief that lower interest rates would bring. That could lead to lower performance if Harris wins the presidency and takes corporate taxes back to 35%. SPONSORED AD [These stocks could surge despite the current downturn]( The market may be down... But when Apple makes this announcement as soon as September 10... These three stocks could start to take off. [Here’s why]( These two stocks shrugged off the market decline last week... As I write this, only two U.S. stocks have closed up six straight days in a row. That’s one impressive performance. It means they totally ignored the supreme volatility of Aug. 2 and Aug. 5... rising even while the markets fell around them. We took a look over the weekend at [stocks that recently entered the Green Zone]( – another strong measure of positive momentum, though not exactly the same thing as a win streak. The stocks that cannot be stopped right now are CBOE Global Markets (CBOE) and Public Storage (PSA). (Disclosure: I own both CBOE and PSA.) We can only speculate as to why these stocks were unaffected by the volatility... CBOE, being in the business of operating the Chicago Board Options Exchange, makes perfect sense. When markets go haywire and investors trade more actively, CBOE stands to make more on transaction fees. PSA, meanwhile, seems to be simply the result of a positive earnings report on July 30. The fact that it’s sustained its win streak after the positive report – even through last week’s market turbulence – is a strong sign. Both are quality stocks – with CBOE earning a strong rating of 93 from TradeSmith’s Business Quality Score tool, and PSA earning a 70. Each of them are also right in the buy zone according to Jason Bodner’s Quantum Score – rated at 74.1 and 72.4, respectively. But we got to wondering about these win streaks specifically. Closing up six days in a row is rare for any stock, let alone in the midst of massive volatility spikes. And it’s not immediately clear whether this is a buy signal or a reason to take profits. So, let’s see what would’ve happened in the past if you bought and held each of these stocks for 21 trading days after a six-day win-streak: - CBOE has gone on 31 separate six-day win-streaks since it went public in 2010. After 21 trading days, CBOE was positive 74.2% of the time following a six-day streak – and returned an average of 1.6% in those cases. - PSA, on the other hand, is a different story... It’s had 59 different six-day win-streaks since it went public in 1993. But 21 trading days following those six-day streaks, it was positive just 55.9% of the time – and the average return was -0.5%. - As a benchmark comparison, the SPY has had 72 six-day win-streaks since 1988. 21 trading days after, it was positive 69.4% of the time with an average return of 0.9%. A long win streak, even amid market volatility, is no guarantee of future success. As we can see from this study, the reasons behind the streak might help tell the difference. There’s another down streak we can look at... On Friday the SPY snapped a losing streak after closing lower for the fourth week in a row. That’s quite rare – only happening 33 times since the ETF launched in 1988. And this brings us back to the “buy the dip” mentality: Intuitively, it seems attractive to buy stocks after they’ve fallen for so long. But we don’t need to rely on our gut to know if it’s a good idea... the data can prove it. So, let’s plot out the forward returns after buying SPY after four down weeks in a one-month, six-month, one-year, and two-year basis... - After one month, the S&P 500 was higher 60.6% of the time, but with an average trade of 1.9%. - After 6 months, it was higher 75% of the time, and returns jumped to 8.4%. - One year later, the win rate jumped to 82.4% and the average trade was almost 13%. - And two years later, the win rate was even higher at 83.3% and the average trade was 24.4%. Bottom line: this rare signal is one to buy – not ignore. That’s it for today. Tune in tomorrow for a special message from Lucas Downey and Jason Bodner. Keith Kaplan has his eye on seasonality as well, and you’ll be hearing his latest insights on Wednesday. To your health and wealth, [Michael Salvatore signature] [Michael Salvatore signature] Michael Salvatore Editor, TradeSmith Get Instant Access Click to read these free reports and automatically sign up for research throughout the week. 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