A TradeSmith Research Lab Check-In

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Let’s check in on the TradeSmith Research Lab…
How the benchmark-beating MVO strategy did in July…
A perfect opportunity for a Snapback trade…
Something big is coming…
Our readers have some notes for us…
And we want more…

The TradeSmith Research Lab is a magical place…

It’s where dozens of our data scientists, software engineers, and investment analysts meet regularly to roll up their sleeves and find new ways to beat the market.

Beating the market is the Lab’s only objective. Anything and everything that gets us there is on the table.

Because the data proves that beating the market is no small matter. It’s extremely difficult… and extremely important.

A 2017 paper from Henrik Bessembinder found that just 4% of the stocks from 1926-2016 produced returns that outperformed Treasury bills.

That’s a big deal. 96 out of every 100 publicly listed companies fail to outperform the risk-free return on cash. A far slimmer fraction beat the benchmark S&P 500 itself.

And as we demonstrated last week, the Federal Reserve’s meddling with the money supply has made it even more difficult to get ahead here in the 2020s.

We didn’t think it would be easy to build a research unit that could consistently find market-beating strategies. It’s taken us blood, sweat, tears, and years of refinement.

We didn’t think it would be cheap either. That’s why we’ve put tens of millions of dollars into building this lab.

But we knew that when we got it right, it would produce incredible results.

Today’s Daily is all about showing you the latest and greatest of those results… Including one strategy that, given market conditions, should be at the top of your dashboard right now.

We’ll get to that shortly…

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First, a quick check-in on a Lab strategy we brought you last month…

If you’ve been trading markets for any amount of time, there’s a good chance you’ve realized that the “Efficient Markets Hypothesis” is one of the more embarrassing theories of traditional finance.

It’s the assertion that stock prices are an accurate reflection of information at any given time. Bogus, I know.

More importantly, following it can lead to a lot of wasted potential.

Recognizing this, our lab researchers sought a way to use the same math that “proves” efficient markets hypothesis, turn it on its head, and produce a strategy that vastly outperforms the benchmarks by holding only the best five stocks.

That simple approach, tested from 2018 to today, beat the Nasdaq 100 by 4-to-1.

We then took it a step further. From our original piece:

As we’ve been discussing lately, our company is highly interested in the idea of monthly rotation strategies that keep your holdings fresh and ensure you’re always in the best stocks possible.

And not for no good reason. These strategies ideally take just a few minutes of work per month and tend to make a positive impact on your results.

We applied this approach to our MVO model on the Nasdaq 100 benchmark. Importantly, this strategy involves rebalancing the portfolio for equal weighting at the start of each month.

And the results are even better.

Just five stocks… five minutes of work a month… and admittedly a heavy Dramamine habit to deal with that volatility…

Turns a 240% buy-and-hold return into more than 1,300% over the same length of time:

It’s a fascinating time to talk about this strategy, because the portfolio just got a new entrant in Advanced Micro Devices (AMD). Here are the current five holdings along with the month they were added to the portfolio:

Make special note that this algorithm identified The Trade Desk (TTD) as a buy in 2018 and has held it ever since. Same with Nvidia (NVDA) in October 2019… Tesla (TSLA) in May 2020… and Strategy (MSTR) in March of last year – around the time bitcoin started charging higher.

If you decided to follow that strategy and have been waiting for an update, here it is: the holdings for August have not changed. All you need to do is adjust them to make sure they’re sized equally.

This is a long-term strategy. But I can’t help pointing out just how well these five stocks did last month:

On average, the five positions returned 10.81% in July while the Nasdaq returned 2.2%. Even on this one-month timeframe, we’re looking at just shy of a fivefold outperformance even with two losing positions.

As we said then, we’re working hard behind the scenes on this strategy and other benchmark-beating rotation methods. If you’re one of our valued Platinum subscribers who get everything we put out, you can expect to get first crack at them. And if you’re not, stay tuned here to TradeSmith Daily (or TradeSmith Insider for our paying subscribers) for the first word on when and how they’ll be available to subscribe to.

Now’s a great time for another Lab discovery…

Earlier this year, we debuted our Snapback strategy, which seeks out brutal short-term price drops with the aim of trading the “reversion to the mean.”

I always check in with this signal around times like now, when the benchmarks experience big short-term pullbacks. And wouldn’t you know it: there’s an active signal on Charter Communications (CHTR).

These signals pop up when the short- and mid-term price trends widen out to the downside, typically the result of a brutal short-term selloff… while the stock itself is at a three-month low.

We backtested this signal over 10 years of data, and it showed us that in 80% of cases, these stocks traded positive after either hitting their exit criteria or 21 days later. Counting both winners and losers, the stocks returned an average of about 16%.

A 16% gain from CHTR’s Snapback signal would put the price back over $300 per share – and it’s even lower today than it was when the signal fired.

Considering CHTR is at its most oversold level since mid-2022, based on its Relative Strength Index (RSI), this might be a trade worth considering.

TradeSmith CEO Keith Kaplan has hand-picked 10 more of these Snapback-style trades for you here – but you’ll want to grab them now, before this “melt up” event unfolds.

Our newest breakthrough is set to arrive next week…

TradeSmith, armed with such analytical and engineering firepower, has gotten into the habit of making investment breakthroughs.

We had one at the start of 2025, with our new Seasonality tool and Seasonal Edge strategy, which just helped us stay ahead of the early August volatility.

We had one again in March, with the Snapback tool I just showed you.

And more recently, we had one with our new TradeSmithGPT algorithm – designed to help you turn any market move into a high-odds options trade.

A new breakthrough is set to arrive next week. And it involves years of research into the realm of order flow.

Understanding order flow can give you a big edge in markets. It shows you where the investors with the deepest pockets are emptying them.

Often these signals are inscrutable… designed to fly under the radar. But we’ve discovered a way – using advanced quantitative algorithms – to make following them as simple as possible.

Not only that, but we’ve also discovered a way to further exploit these signals with smart leverage opportunities.

You’ll hear more about this new breakthrough of ours directly from Keith tomorrow. Along with that message, you’ll get an opportunity to test drive our newest release of this software for free. Don’t miss it.

The TradeSmith Daily inbox (that’s feedback@tradesmithdaily.com; we invite you to write in anytime) saw a few interesting notes this week…

Here’s one from a Mr. Kent…

I watched the recommendations for Acadia Pharmaceuticals in your tools and made 9.1% in just over a week.

Thanks so much.

– M. Kent

That’s my favorite kind of email to receive, M. TradeSmith is all about developing software that helps everyday investors make market-beating profits without taking on excess risk.

I didn’t see you mention what tool you used, but Acadia Pharmaceuticals (ACAD) happens to be firing on multiple cylinders.

It just recently re-entered the Green Zone after a long stretch in the Red Zone – a sign of positive momentum:

It’s got a bullish seasonality period coming up in early September, an anomaly from the broad market weakness:

And the Predictive Alpha Prime model is bullish on the stock through September 4:

In any case, glad you made money, M. Here’s to more profits ahead from using TradeSmith’s tools…

Next up is Bert with some kind words on our recent TradeSmith Roundtable episode…

The recent Roundtable discussion is a gem, please make that a regular happening.

We all need that kind of insight, and being able to hear the combined guests makes TradeSmith the greatest source of market wisdom available to individual investors, bar none.

– Bert

Ask and ye shall receive, Bert. We’re already planning the next Roundtable, with a full docket and a new mix of guests to keep things fresh.

Next up, a quick note from Herman…

Useful letter and love your top summary headers.

But… how about linking each header to quickly go to that topic?

– Herman

Hey Herman, great suggestion. I don’t think we can pull this off in an email (maybe we can?), but I’ll talk to our web wizards about anchor-linking those section headers on the web versions of our TradeSmith Daily Digests.

And lastly, Fabian writes in to continue our discussion on the “Peak AI” problem…

Good post. And you mention one big problem with AI that intuitively makes sense to me: verification of results.

They always say that, for instance, entry level legal positions are going to disappear. Very well, but who is going to check the AI output?

Moreover, given the huge scanning capabilities of AI, the output will be enormous and you have to check everything.

By the way, when they came with the personal computer in the early ‘90s, they said paper will disappear. It didn’t really.

– Fabian

Thank you for writing in, Fabian. You’re right to point out that the promises of world-changing technology can be safely compromised by something like 60%. Computers may have reduced the reliance on paper – I have personally never received a paper mortgage statement, for example – but they’ll never kill it entirely. At least, not anytime soon.

The potential for job loss from AI may be similarly overstated – as could, say, its ubiquitousness as the arbiter of all the world’s information.

I’m not knocking the potential of AI – it is very useful and growing more useful by the day.

I’m simply saying that we have to search out that moment where the promises stop making as much sense as taking profits. We had plenty of those moments during past technological manias. The internet was a big one. But we can look at things like 3D printing, 5G, NFTs, the Metaverse, and a whole host of other big promises that – even if they did bear some fruit – weren’t a perpetual driving force on stock prices.

We haven’t reached that moment yet for AI. And we may not for quite a few more years. But by considering and discussing these holes in the plot, we can be better prepared for when that moment arrives.

That’s it for the mailbag this week. Must say, this is a muscle I quite like stretching. So keep that feedback coming.

Sticking with the AI theme, here’s a prompt for all our subscribers out there…

Which of TradeSmith’s signals, strategies, or software tools do you use most regularly in your analysis and trading? How could we make it better?

That email address once again is feedback@tradesmithdaily.com. I love reading every email that comes in, but you should know that we only publish the ones we feel can best benefit our readers.

In addition, some may be better handled by our support team (support@tradesmith.com, where I forward these sorts of requests).

A TradeSmith Research Lab Check-In