Shutdowns Are Bullish BY MICHAEL SALVATORE, EDITOR, TRADESMITH DAILY In This Digest: Use this to plan out your 2025 trades… Inflation data shows last week’s selling was overdone… The last look at Power Factor stocks for the year… The government shutdown is chaotic but not at all bearish… We’re wrapping up the year here at TradeSmith… Today’s our last day in the office until 2025. I’m writing this dispatch Friday morning, with the core PCE (personal consumption expenditures) numbers on my second monitor. Don’t worry… We’ll get to those, and the impact they had on the market, in today’s issue. (As it turns out, there were indeed presents hidden beneath the coal.) First, a word on what we have to look forward to in 2025… As always, we’ve been hard at work developing new software and strategies for our customers. That’s the cool thing about a TradeSmith membership: You can always expect not just what you signed up for, but for all the innovations we come up with to continually make things better. A lot of new features and upgrades to existing ones are coming in 2025. But today, I want to talk about an improvement that’s hitting for Trade Cycles subscribers on Jan. 1. And how, for a limited time, you can test it out for free, even before signing up for Trade Cycles. It’s an early look at seasonality for 2025. With your free access to this tool at the above link, you can plug in any stock you like and see when, historically, is the best time to trade it next year. Here’s just one example (you can create as many of your own as you like) on OG e-commerce company eBay (EBAY):
EBAY has two key seasonality periods coming up toward the start of the year. From Jan. 11 through Jan. 26, the stock rose an average of 2.62% over the past 15 years… and that’s immediately followed by another 5.08% rise from Jan. 20 to Feb. 19. But the real big gain is in the summer, where starting on May 20 and through July 24, EBAY has shot up an average of 10.54%. But once that move has happened, you’ll want to avoid (or trade puts on) EBAY in September and November, where it tends to underperform. All this data is based on a 15-year, highly relevant lookback. All these highlighted periods have an accuracy rate of at least 80%, indicating the corresponding move has happened that frequently in the dataset. And you can look at more than 5,000 stocks, at your whim, for free. Take some time today to plug your key portfolio holdings, or stocks you like to trade, into this tool. Then go ahead and set some reminders for yourself to trade those stocks at those times, including the direction, accuracy rate, and average returns. But, of course, we’ve been working on a lot more than this early look at 2025 seasonality… This Wednesday, our CEO, Keith Kaplan, will write to you all about a new strategy we’ve devised that uses seasonality to its utmost potential. It’s a method that, in a rolling 15-year backtest since 2006, beat the S&P 500 by more than double on average each year. More details to come on that Wednesday. And for those who can’t wait, there’s some more info here as well. The market found the presents… As we covered Friday, the market collapsed on the back of the Federal Reserve’s hawkish press conference. And today, it’s soaring on the back of light inflation data. The fear was, and still is, in higher-for-longer interest rates. But the core PCE numbers out Friday morning helped ease those fears considerably. Data showed the core PCE rose only 0.1% from a month ago. And at a 2.8% annual rate, it’s the lowest rate since May of this year. We said on Friday that a light PCE number could prompt a wave of dip-buying that undoes some of the damage we saw earlier in the week. That turned out to be correct: The S&P 500 was up 1.64% at last look, recovering nearly half of the losses. With renewed bullishness hitting the tape, stocks on a 2% discount from all-time highs, and the year about to close out… I’d say it’s time to poke through the latest Quantum Edge Hotlist… Power Factor stocks are exactly what you want to buy on dips… A 34-year backtest by our own Jason Bodner proves that these stocks are the best ones to own. A biannually rotated portfolio of the top Power Factor stocks beat the market by 7-to-1. That’s like taking your average 401(k) from a guy who start working in 1990 and is in his mid-50s now, and multiplying it by 7. As a reminder, the two Power Factors are 1) earnings and profit margin growth, and 2) the telltale signs of institutional capital rushing into stocks. We quantify those two factors into scores, and then rank thousands of stocks based on those scores. Then every Monday, we email them to our Quantum Edge Pro subscribers so they can see the top 10 and bottom 5 Power Factor stocks in the market:
Regular readers are beginning to notice something. The stocks consistently ranked at the top end of the Quantum Edge system don’t seem to change all that much. Arista Networks (ANET), MakeMyTrip (MMYT), Apollo Global (APO), Royal Caribbean (RCL), and AvePoint (AVPT) have all made the list week after week for the past two months… among others. The only new name I see at the top this week is SEI Investments (SEIC), a mid-cap investment services company with some serious momentum behind it. The stock is up 32% this year, beating the market… but most of that gain is in just the last few months. The stock is also pretty cheap at a price-to-earnings ratio of 20. (That’s compared to other mid-caps, anyway. The S&P 400 mid-cap index trades at 24 times earnings. Financials stocks more broadly trade at just 16 times earnings). Any new entrants to the Quantum Edge Hotlist are worth checking out. I’m especially excited to see this week’s list. It will be interesting if we see any major reshuffling happening after last week’s volatility. Quantum Edge Pro subscribers will have that in their inbox this afternoon. And if you’re not subscribed to that, and want to join in the fun of finding great small- and mid-cap stocks for 2025, go here for more info on a membership. The government might shut down, but that’s not necessarily bearish… As I write, it’s not yet clear if we’ll face the first government shutdown since 2018, the longest in history and the third in the 21st century. But we should understand that however chaotic it will seem coming out of the mainstream media, with pundits breathlessly warning against risks to financial markets… shutdowns aren’t the bearish spectacle they might seem. Let’s look at the data… First, the October 2013 shutdown. That lasted 16 days and was caused by a standoff over funding for President Barack Obama’s Affordable Care Act. What did the S&P 500 do? It rose more than 3%. Then the January 2018 shutdown. That one lasted just three days and occurred over a weekend, and was caused by a dispute over immigration policies. Still, stocks rose just over 1% by the time it was resolved. Then the late 2018 shutdown. This one was a doozy at 35 days, the longest ever, and was due to funding for the U.S.-Mexico border wall. Sounds bad, right? Nope – stocks rose more than 10% during this monthlong period. (Though, to be fair, at least some of that likely had to do with a recovery from the market’s interest rate-induced temper tantrum from the month before.) We can even look at the two 1995 shutdowns in November and December… where stocks gained 0.8% and 0.3%, respectively. The conclusion is, despite what the headlines would have you believe, that shutdowns are bullish. I cannot say if the government is shut down right now… But if it is, the data shows it’s a buy signal. And even if it’s not, keep this in mind next time some “continuing resolution” to keep the government open gets down to the wire. To your health and wealth, Michael Salvatore
Editor, TradeSmith Daily | 