A Reliable, Ugly Signal: Pay Attention, Prepare and Profit

There is no doubt the S&P 500 (SPY) has been on a tear lately.
The index is up roughly 25% in 2019.
But we are starting to see lots of extremes enter the market . . . extremes that should concern us as investors.
First, in this market environment we are starting to see the RSI (14), an accurate measure of intermediate-term mean-reversion, hit overbought extremes. When the RSI (14) hits overbought extremes, it is tough for the bulls to maintain momentum over the next several months.
market environment
The last time we saw readings like this was in early 2018 . . . a year that saw my strategies hit annual returns of 704.7%. That’s right 704.7%.
If the RSI (14) is any indication, I expect to see similar results in 2020.
Second, we are seeing historic complacency in the market as indicated by the VIX.
market environment
Again, we are seeing levels not seen since early 2018 . . . a year in which we had 75 total trades with only 11 losing trades . . . a win rate of 85.3%
My strategy of choice in this market environment is something I informally call the bloodbath strategy.
It’s probably the most-used trading strategy in my arsenal for a variety of reasons. Here are a few:

  • I believe the market doesn’t crash higher; it crashes lower.
  • The strategy allows me to have a margin of error just in case my directional assumptions are wrong.
  • I can define my own risk/reward before entering a trade.
  • And, I can choose my own probability of success on each and every trade I place.

The beauty of the strategy in this market environment is that the stock or ETF doesn’t need to move in any particular direction. All we need is for the underlying stock price to stay below the price we set for the short amount of time we’re in the trade.
If you’re worried about the stock market environment and want to start 2020 prepared, my Bloodbath Strategy is one of the soundest, most profitable ways to make money when stocks are under pressure.

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