It’s the Perfect Time for This Low-Risk, High-Reward Strategy  | BY KEITH KAPLAN
CEO, TRADESMITH |
They say you should never try to catch a falling knife. That’s certainly true… if you’re doing it without a plan. But if you do it with the right stocks, buying into a downtrend and banking on a reversal can be quite lucrative. A couple months back, we got the idea of designing a system that’s like catching a falling knife with Kevlar gloves on… where we minimize the risk and trade only the rarest setups with a strong track record of working. We tested tons of different variables, and eventually we found one combination that produces a rare but quite reliable trading signal. By targeting quality stocks in sudden, steep downtrends… You can bank on a quick reversion to the mean that sends the shares much higher from your entry. Why talk about it now? First off, it’s about to go live in TradeSmith Finance for Trade360, Ideas by TradeSmith, and Platinum subscribers. We wanted folks to be ready to grab some serious gains, as TradeSmith is picking up an ultra-rare bullish signal in the markets right now that only comes around every few decades. And that signal is really key to this whole strategy. You see, our data shows that we’re in a rare kind of market that we previously only saw in 1996… and then 70 years earlier, in 1926. If your market history is sharp, you know those were the early stages of massive investment manias that went far further and lasted much longer than anyone expected. Both were powered by technological breakthroughs… financial institutions lowering the barrier for smaller investors to participate… and a consumer credit revolution that spurred the economy higher. These are all things we’re seeing the beginnings of today. And what we’ve found is that these specific conditions signal the start of a “mega melt-up.” In markets like this, stocks can post monumental gains, year after year. For example, the S&P 500 rose more than 20% every single year from 1996 to 1999, until the bubble popped in September of 2000. The Nasdaq did even better, returning 42%, 20%, 83%, and 102% in that four-year period. Individual stocks did even better, with companies like Microsoft (MSFT) returning more than 1,000%… Oracle (ORCL) returning more than 1,200%… and Amazon (AMZN) hitting a peak of 8,509% from ’97 to ’99. But of course, every melt-up eventually turns into a meltdown. That was true 100 years ago, as the Roaring ‘20s gave way to the Great Depression. And it was true 30 years ago, when the dot-com boom turned into a bubble and a bust. But no matter if we’re in the boom, bubble, or bust phase of a melt-up, this strategy is perfectly suited to catching quick gains as stocks recover from quick sell-offs. More on all this in a brand-new presentation later this week. But today, let’s focus on the strategy… How This New Strategy Delivers Rare, Powerful Gains Setups from our new strategy don’t happen often, and they rarely happen in stocks with a low Volatility Quotient (VQ). For new readers, VQ is our measure of a stock’s individual volatility. The higher the score, the more volatile in the name – and vice versa. That makes sense – high-quality stocks don’t tend to make big drops. The market rewards great businesses with higher share prices. But every so often, a bad earnings report or a shock macro event can throw these stocks off their game. And that’s when we want to buy them. We tested this new strategy on the S&P 500 going back 10 years. Of the 339 cases we found – roughly a third of which were during the initial panic sell-off of March 2020 – just under 80% saw positive returns 21 trading days later. And the average return, counting wins and losses, was about 16%. That’s a strong signal… with great returns for such a short period. It makes for a great swing-trading strategy. Now, I can’t tell you the exact parameters of the newest version of this strategy. If I did that, anyone could go and set it up and trade it for themselves… which wouldn’t be right to our subscribers. But I can show you a couple examples… like this one. In our backtest of this strategy, we spotted a trade on Humana (HUM) during the pandemic crash. The Snapback signal triggered on HUM at $206.99 on March 23, 2020. Buying it then and holding for the next 21 trading days probably sounded like a horrible idea at the time. But you would’ve walked away with a 71.6% return as the stock recovered to $355.18: 
This was the pandemic, though. A lot of stocks pulled moves like this. Let’s look at a more isolated incident involving insurance company Globe Life (GL) from last year. GL was the target of a short report that accused insurance fraud. The stock dropped more than 50% in a single session, and that was enough to trigger the Snapback signal on April 15 at a price of $55.52. Twenty-one trading days later, the stock recovered to $88.10. returning 58.7%, as you see in the chart below: 
Then there’s one of the cleanest examples I’ve found – a case from 2022, in Caesars Entertainment (CZR). The signal triggered at $32.36 on Sept. 30… and would’ve led to a 35.5% gain if you’d sold it 21 trading days later (on Oct. 31) for $43.73: 
These are some of the best performers the system found over the last 10 years. To be clear, there were losers, too. But in our study, only one-fifth of the signals lost money. So, I’m guessing you want to try it out? Good news: There’s a live signal right now. A Tradable Signal on FMC Check out this chart of chemical manufacturer FMC Corp. (FMC): 
On Feb. 11, this strategy flashed a new trade on FMC. The rules are, the system were to have bought on Feb. 11 and held through March 13 (21 trading days). We’re a bit late to this trade, but it is currently the most recent signal in our system. Luckily, the price hasn’t moved much. But it has trended a bit higher. You could buy FMC on Monday and look to sell it as it reaches the average gain the system achieved in our backtest – about 16%. Even now, that’d be a very respectable return for the remaining 12 trading days. Now, it’s important to understand that FMC is currently in the Red Zone, meaning it would not (yet) be a candidate for a long-term buy and hold. But we’re talking about something different here. We’re talking about trading FMC for a short time as it recovers from its beaten-down price, only 21 trading days. We’ll be rolling this strategy out to our Trade360, Ideas by TradeSmith, and TradeSmith Platinum subscribers very soon. When we integrate it into TradeSmith, they’ll be able to see new entry signals on this strategy and follow along if they wish. We’re finally in another “Roaring ‘20s” for the stock market, and I expect there to be tons of really exciting opportunities as long as this melt-up persists. Ahead of that launch, I’ll be holding a free demo where I’ll show how to find 10 “melt-up stocks” for the historic market conditions TradeSmith is picking up now. Click here to save your seat for my Last Melt-Up event on Thursday, Feb. 27, at 8 p.m. Eastern. All the best, 
Keith Kaplan
CEO, TradeSmith | 
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