STP Algo Trader - Market Insights

The architects of Signal Trader Pro (Mark Intrieri and myself – Enrique Abeyta) are big sports fans.

It's a close contest, but my favorite sport is probably baseball. Mark also likes it, but he was a better player than a fan. He has a great arm! Me, not so much…

The most appealing aspect of baseball to me is the strategy.

Unlike many other sports with pauses, the players have to figure out their next move. The idea of "waiting" is a concept that plays a much bigger role in baseball than any other sport.

A lot of the strategies that are useful in baseball also lend themselves to trading.

One of my favorites is the concept of “waiting for your pitch.”

The concept is simple. Even if you are a great hitter, if you are facing a competent pitcher, it is almost impossible to hit every type of pitch they may have in their arsenal back-to-back-to-back.

A decent pitcher will have a fastball, curveball, and changeup, making it too hard for the batter to hit every pitch from each. It is a lot easier for the pitcher to do…

This means that really great hitters learn how to wait or “sit” on a pitch.

If they know the pitcher and his arsenal, they can predict that the pitcher will throw the pitch they are looking for and often can predict when they will throw it.

This is a logical process but can also be very frustrating.

Imagine waiting for the fastball, and then the pitcher throws a changeup that is 15 miles per hour slower and that you could have belted over the center field fence. You would want to throw your bat!

Great hitters, though, know that they need to look at the population of pitches and not just a single pitch or at-bat.

If they have a great process, then ultimately, it will work. Even if they have to let some very hittable balls go right by them.

This is exactly where we are right now in the stock market!

Take a look at this chart of the S&P 500…

After tremendous volatility in early April, the index has traded higher for nine days. This is the longest winning streak in over two decades, going back to 2004.

At Signal Trader Pro, we predicted that we would see a rally. We had no idea it would go this far or this many days, but we knew it was coming.

This is why when we executed the close-out of positions involved in our BULL SWITCH, we didn't do it immediately after the initial selloff. Experience has taught us that waiting five days before executing these sales is best.

This strategy paid off. While most of those positions were closed at a loss, the loss was considerably less, and some positions moved to profitability.

Given the damage done in this selloff, even had we maintained those positions for the second half of this recent rally, it would not have significantly changed the results.

Given our long experience in the markets and the criteria for executing the BULL SWITCH, we knew this would be the case. We only do it after we have seen volatility hit levels that mean that a quick, full recovery is literally impossible.

In the last week, though, we have moved into the next stage of this selloff.

This is when the market begins its recovery from extremely oversold levels but then begins to draw investors back into stocks. This stage is particularly dangerous when we have a selloff that came off of recent highs.

Investors have been accustomed to a year and a half of a steady uptrend where buying the dip worked every time. So far, it has not worked this time as the market went down so far that if you had bought in March, you are still likely underwater in many of your positions.

This oversold rally, though, is happening close enough to the recent highs and an extended BULL market that investor memories are fresh with the idea of buying the dip.

The trickiest part is that we think they WILL likely be right. Just not in the next month or two, and there is also a chance they are VERY wrong.

What does this mean?

We have seen the type of selloffs that trigger the BULL SWITCH roughly fifteen times in our thirty-year career. That is roughly once every two years.

Two-thirds of them result in the stock market returning to the previous BULL trend. One-third of them result in a new BEAR market.

The issue is that we don't know the result for at least three to five months AFTER the initial selloff. This is enough time for a new trend to reassert itself.

Also – in NONE of these cases did, the stock market "V" out to new highs in less than a few months without a significant retest.

We think that will be the case here again.

With our BULL SWITCH, we move our buy trigger signals higher. We are only looking for the highest quality companies that are very oversold. With the stock market going up every day for two weeks, this means we have not seen many signals.

This doesn't mean we will not see them, though, and potentially see them very soon.

The system is perfectly set up, so we can wait on our pitch. When we get it, we think it is going to knock the ball out of the park…

We’d love to hear from you! Let us know your thoughts in the comments section online or at [email protected]

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