How to Spot a Megatrend in the Early Innings

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Some good news on inflation
And some bad news for risk-free income
How to spot a market megatrend before the crowd catches on
A collaboration with “King of Quants” Louis Navellier
For a limited time, grade your favorite stocks for free

We finally have a new inflation report…

The government shutdown delayed it by two weeks. But the latest Consumer Price Index (CPI) report out this morning showed some good news for consumers and traders alike.

The CPI rose 0.3% over the last month, slightly lower than the 4% most Wall Street analysts expected. That was still enough to nudge the annual inflation rate to 3%.

This comes just two weeks before the next Fed decision on interest rates. And even though inflation is on the rise, the slower pace will support the already overwhelming odds of another 25-point cut.

That’s what made the markets sing. On the report release, S&P 500 futures spiked 0.75% before the Friday open.

As we’ve discussed in these pages, the Fed’s choosing the lesser of two evils. Inflation is not going down. But the labor market is slowing. So it’s choosing to lower rates and risk higher inflation to support the jobs market.

But no matter what happens with inflation… or what the Fed does next… at TradeSmith, we have the software tools and analytics to help you profit.

So today, let’s take a closer at one of the tools that’s been turning heads lately with some big winners.

It’s a way to detect powerful market megatrends before most mainstream investors catch on.

And unlike all the other tools at TradeSmith, its main focus isn’t stock market data… but data from an entirely different source. One that’s growing in importance every year.

First, it’s important to understand how inflation and interest rates affect your wealth… and make the case for owning stocks even stronger.

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The only return you can spend is your “real” return…

It’s what you earn on your money after taking inflation into account.

Take the yield on the 1-month Treasury bill. It guides rates on savings accounts, CDs, and money markets.

Right now, you can earn a yield of about 4% on a 1-month T-bill. But with CPI running at an annual rate of 3%, that’s a real return of just 1%.

And thanks to the Fed’s new rate-cutting cycle, that real return has been plunging. It’s down 60% since May – when the real return was more like 2.5%.

Risk-free income has had a good run since 2022, but the party’s over.

The good news is, there are plenty of ways to make money in stocks…

I’m not about to say you shouldn’t have any cash savings. That’s just testing fate.

But as the savings rate falls and inflation climbs, the incentive to invest rises exponentially. At least your money will be in productive assets that can outpace the rate of inflation… and, at best, do a lot better.

Other investors will get wise to this as they see their incomes dwindle. Getting ahead of that realization will make you all the more successful.

Even more important is to find the best investments out there – the highest-quality companies participating the highest growth trends.

That’s a two-part problem that’s hard to solve on your own.

How do you know what the most important trends are – and how do you spot them early enough to matter?
And once you do figure that out, how do you find the best stocks?

Enter TradeSmith and its industry-leading analytics software.

Our team has dozens of software engineers, data scientists, and “quant” investors to design hedge-fund level tools for regular investors.

We’re best known for software that reads and interprets vast amount of stock market data. That’s how we made our Seasonality breakthrough, as just one example of many others this year.

By studying decades of price action, we developed an algorithm that could spot hidden seasonality patterns in stocks.

And we do something similar with our Predictive Alpha AI model. Except that while Seasonality looks for the most enduring historical trends… our AI is more reactive. In fact, Predictive Alpha uses more than 100 billion data points every day to forecast prices on more than 2,000 stocks up to 21 trading days out.

We even design trading tools you can’t get anywhere else – like the Fair Value line, which helps you get the best deal on every options trade you take.

But we don’t just rely on stock market data for our insights.

At our MegaTrends advisory, brothers Andy and Landon Swan track online consumer behavior.

Their LikeFolio data engine ingests social media chatter, website visits, and search data to help them find emerging market megatrends.

Anyone can spot a fad online – what Andy and Landon do is uncover unstoppable market forces that are global in scale and poised to reshape the world for decades to come. Most recently, they covered America’s new space race, for example.

All thanks to LikeFolio’s Data Engine. In one day, it processed 1,230,030 items–from Reddit alone. That’s nearly 30 million data points a month… from just one of its data sources.

Using LikeFolio, Andy and Landon even get an “X-ray” view into website traffic trends for hundreds of publicly traded companies.

They boil all this data down to a Social Heat score. It shows how popular a company is with its customers – whether everyday people or big enterprises.

It’s what put them on the early side of the telehealth trend with stock Hims and Hers Health (HIMS). In May 2024, they closed out a trade on HIMS in MegaTrends model portfolio for a 64% gain in less than six months.

It also got them on the right side of the latest crypto cycle. They recommended brokerage app Robinhood (HOOD) and crypto exchange Coinbase (COIN) in early 2024, long before the crypto crowd rushed in. Those trades could have earned subscribers gains of 557% and 445%, respectively.

It even helped them identify big brand stories like energy drink maker Celsius Holdings (CELH) and footwear company On Holdings (ONON). Those stocks returned 390% and 137% after the Swan brothers recommended them.

The Social Heat score is a great way to find new trade setups…

I ran a screen on stocks in our database that…

Have a Social Heat score of 70 or more
Are in the major S&P benchmarks – the large-cap 500, mid-cap 400, and small-cap 600
Are in the Consumer Cyclical, Technology, and Healthcare sectors

Just 15 stocks pass this test. Here are the top 5, sorted by Social Heat Score.

Topping the list is Alphabet (GOOGL), with a Social Heat Score of 88.1. Not far behind are auto-parts retailer O’Reilly Auto (ORLY), semiconductor firm Advanced Micro Devices (AMD), social media conglomerate Meta Platforms (META ), and ridesharing/delivery app Uber Technologies (UBER).

These stocks are all strong buys, according to their Social Heat scores. But we can do even better by layering in another quantitative tool.

That tool is Louis Navellier’s Stock Grader…

Louis is a 45-year investing veteran who pioneered one of the first quantitative investing models. To this day, his Stock Grader system ranks more than 6,000 stocks using factors like sales growth, margins, earnings momentum, and institutional buying.

Each stock earns a letter grade – from A for top-tier growth and quality to F for poor fundamentals.

It all started back in the 1970s when Louis was working on an old mainframe computer the size of a room.

That’s why they call him the “King of Quants.” He was one of the first guys on Wall Street to use computer programs to beat the market.

And Louis didn’t just beat the market… he crushed the returns most investors were getting.

In one 10-year run ending in 1996, Hulbert’s Financial Digest reported that his newsletter portfolios had produced a return of nearly 1,400%.

And his success continues to this day. Back in June, Louis advised his readers to sell Powell Industries (POWL) after a 100% run up… And in July, Louis recommended closing a trade in fintech payments platform Sezzle (SEZL) for a 555% gain.

Since launching his first newsletter in 1980, the Navellier Stock Grader has flagged 675 stocks that doubled investors’ money or more – including 22 that rose 100-fold.

The real magic happens when the Swans and Louis join forces…

Of the five stocks that ranked at the top of our Social Heat screen above, UBER only gets a C – but the others are all in the buy zone with an overall B grade.

Louis’ Stock Grader is composed of two weighted components you’ll see below with one of our contenders, ORLY. There’s the Quantitative Grade, which measures money flows and buying pressure, and the Fundamental Grade, which measures sales and earnings growth:

Because the grades are weighted, an especially strong Quantitative Grade can push up the overall score. And that’s exactly what we’re seeing with O’Reilly Auto.

In fact, this stock has been a buy all year, as you see with the green bar above. All the while, it’s often beaten the market 2 to 1.

Combining that with the Social Heat Score suggests fair winds may be ahead for ORLY, too.

The best part about having this Social Heat Score is that there are always great, fresh ideas you hadn’t considered before. For every Celsius Holdings that made their readers thousands when the healthy energy-drink craze kicked off… there’s an Alani Nu rising up to flip the script yet again.

In fact, we developed a whole strategy that combines online buzz with classic fundamentals and momentum indicators…

And this collaboration between the Swans and Louis Navellier’s systems, which we’re calling The Ultimate Stock Strategy, had truly inspiring results in our backtest.

The combo could have identified stocks that doubled in value every six trading days on average over the past five years. That’s over 240 doubles during various market conditions.

And as they’ll share in their Ultimate Stock Strategy kickoff Tuesday…

The strategy also steers you away from stocks that fail to make the grade – preventing losses up to 97%.

Tuesday’s webinar is free to attend… and you can use the Navellier Stock Grader for free, too, in the meantime. Click here to try it out when you RSVP now.

How to Spot a Megatrend in the Early Innings