- HX Daily
- Posts
- How We Adapt to a BEAR Market
How We Adapt to a BEAR Market
STP Algo Trader Vol. 1 Issue 10
Welcome again to STP Algo Trader!
We are kicking off our third week here and hope you have been enjoying the content…
Here is a reminder of our content schedule…
Tuesday – MARKET INSIGHTS - We share insights driven by the data from the system. We also discuss how the system evolves based on market data.
Wednesday – USER BLOG - We share the STP “User Blog.” This is where one of our users shares their experiences with the system. We will welcome any user submissions for this letter in the future.
Thursday – POSITION REVIEW - We thoroughly review a recent position. We will go through a play-by-play analysis of why the system chose the idea and how it played out.
Saturday – THE METHOD - This is where we go through each of the individual aspects of our system and explain them in detail.
We hope you had a chance to check it out, and you can access the archives at our algotrader.signaltraderpro.ai website.
Feel free to share any feedback or comments at any time. Either at the bottom of our web page or at [email protected]
Again, welcome to STP Algo Trader. We look forward to making YOU money!
In the last two weeks, we have shared signals that our proprietary algorithmic trading system has generated. You can read those two notes below.
Our data began signaling several weeks ago that there was an attractive entry point into stocks.
Based on our overall signals and historical data, we believe that we continue to be in a very attractive area to buy stocks.
Our "core" settings for our trading system are based on where the market is 85% of the time – a stable or upward-moving stock market.
Here is a chart of the S&P 500 over the last thirty years, and we have highlighted the periods of uptrend versus downtrend…
We have highlighted the upward-moving stock market periods in green and the downward-moving periods in red.
This graphically demonstrates our statement that the stock market is in an uptrend most of the time.
This makes sense, given the economic and profit growth of the companies that make up the S&P 500.
The Signal Trader Pro system, however, has demonstrated that it can make money in both types of markets. We demonstrated this during the BEAR market of 2022.
Our underlying methodology of buying “winning” companies and stocks that have become deeply oversold still works in that environment.
There are several aspects, however, where the system needs to adapt its parameters to the more challenging environment.
First, stocks can become even more deeply oversold in a BEAR market than in a regular market.
Imagine stumbling and tripping while walking upstairs versus going downstairs. In one case, the momentum is working in your favor; in the other, it can mean disaster.
As a result, we need to adapt the trigger for our ENTRY SIGNALS.
We find the 30 RSI level optimal for a typical stock market. In fact, in robust markets, we sometimes struggle to find stocks that trigger this level.
In a BEAR market, however, not only do we see many (most) stocks trigger this level, but they can get even more oversold.
Accordingly, we adjust our ENTRY SIGNAL point to a lower level. It will depend on the environment, but usually, we set it around 20.
This substantially reduces the number of signals during a period where, otherwise, we would get an RSI signal on almost every stock.
Second, a BEAR market is almost always accompanied by a period of economic and corporate profit declines.
More companies see year-over-year earnings declines, many fewer companies beat their numbers, and even fewer see positive earnings revisions.
This means far fewer stocks score on the high end of our "15" point-scoring system.
The ones that do are the highest quality companies in the stock market.
We find the combination – the highest quality companies along with DEEPLY oversold RSI levels – result in outstanding short-term returns.
While our absolute returns may not be as high in these environments as a result of fewer signals, our annualized returns on individual positions are even higher. We make a lot more money faster on fewer positions.
We don't look forward to the next BEAR market in the sense that we know we will make more money in a normal market. That said, we are prepared to adapt the system to an evolving environment.
The final question – and one that we addressed last week – is, how do we know when we have entered a BEAR market?
Again, we look for both the 50-day and 100-day moving averages on the S&P 500 to be trading below the 200-day moving average.
While we have seen much damage to the stock market indices, we are still far from those levels.
We will see what the future holds…
Reply