A Pit Stop… or Something Worse? By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Why the sell-off is more “pit stop” than “pile-up”…
- What we’re seeing in two key market ratios…
- The lynchpin to the AI trade reports today…
- Here’s what two masters of earnings data think will happen…
- The Mega Melt-Up thesis is still intact…
Think of the market like the Daytona 500… If you’re a racing fan, you might have caught the Daytona 500 a couple weekends back. Stock racing cars blitz around an oval loop for 500 laps at an average speed of 180 miles per hour. Every one of those 40 cars is trying to save precious fractions of a second to cross the finish line first. In the process, these cars burn a ton of fuel… and a lot of tread on their tires. They need to regularly make quick “pit stops” to refuel and change tires to make sure they can keep pace and win the race. Over the 500 miles, racers need to take a pit stop anywhere from four to 12 times depending on what happens on the track. Those pit stops, at about 12 seconds each, take up as much as a few minutes from the several hours it takes to finish the race. Those few seconds where the car stands still… for the drivers, the pit crew, and the spectators… feel like an eternity. But they’re nothing compared to a crash… which completely ends the race not just for that driver, but anyone else they crash into. | Recommended Link | | | | When he recommended Microsoft at 38 cents… Google in 2005… and Nvidia before AI was mainstream, people called him crazy. Now they’re calling him crazy again about this overlooked tech stock that’s he’s says could be “The Next Nvidia”. Click here to see the name and ticker symbol. |  |
The question today is, “Are stocks in a pit stop or a crash?”… We’ve been spoiled by the stock market the past couple years. After back-to-back returns of more than 20% in the S&P 500, even minor pullbacks can feel like a brutal crash. Right now, the S&P 500 ETF is about 3.3% down from its all-time high set just a week ago. So, today’s task is to determine whether this is a pit stop or a crash. Let’s look at the evidence… For one, this is hardly the worst pullback we’ve seen over the last year. At the start of last August, the S&P 500 pulled back nearly 8% over the span of just three trading sessions. It fell over 4% in a span of four sessions just before September. Then, in mid-December, stocks fell about 3.5%. So, we already have three corrections in recent memory that aren’t as bad as the one we’re in now. As we mentioned last week, this one feels so much worse because we’re struggling to make new highs. But in my view, this correction is not the start of a crash. In fact, it’s a pretty routine pit stop before we resume the race. One good way of knowing is to look at the market internals… For figuring out how risk-off investors are really feeling right now, there are two ratio pairs you need to burn into your memory: SPY vs. XLP (consumer staples) and SPY vs. TLT (long-term Treasurys). Let’s look at each one and see where we stand. The performance of SPY against XLP is showing some clear risk-off behavior. Staples are outperforming SPY since the Jan. 22 top, with SPY losing about 10% of its value relative to XLP since then: 
SPY/XLP has also broken two key uptrend levels, stretching back to late August 2023 and late October 2024 – as we both remember, these two times were painful periods for the market that wound up being pit stops. Another clue is how oversold this ratio is getting. It just plunged below 30 on the Relative Strength Index for the first time since April 2022, when investors were fleeing to Staples stocks during the bear market. Finally, XLP itself is breaking to new highs. These are all clear risk-off signals. But they aren’t a death knell. Investors want to see a bounce in this chart alongside a few good days of green for SPY. Now, let’s look at SPY vs. TLT. Similar to the chart of SPY/XLP, the ratio between SPY/TLT has seen some worse action over the past year: 
In late July and late August, SPY lost ground to TLT by 10.2% and 7.27%, respectively. Both of those washouts, where traders ran to the safety of long-term bonds, marked significant bottoms in stocks. We’re seeing another similar washout today, with SPY losing about 5.73% against TLT in just a few days. You have to remember, this is a young bull market. Going from the bottom in October 2022, it’s only about two and a half years old. Over the past 50 years, the five bull markets that went on longer than two years wound up lasting eight years on average. Bull markets don’t tend to end at this stage. And certainly not when everyone expects them to. So, I’m inclined to think of all this as a temporary correction more than anything else. And one final signal of comfort is our indicators at TradeSmith… This chart of SPY, along with its Yellow Zones and Red Zones, should show you why. As of yesterday’s close, SPY is about $40 above its Yellow Zone. That would be an area where we should start to have real concern about the market’s direction. The Red Zone is all the way down at around $530. That’d be about a -13.5% drawdown from the all-time high: 
Until we start to approach that Red Zone, we’re still in healthy correction territory. But we should be mindful of any catalysts that could accelerate the pain. Nvidia earnings are either a blessing or a curse… After today’s close, Nvidia will release its annual earnings report. (Disclosure, I own shares of NVDA at time of writing.) This is a big one. Nvidia has been a market leader ever since the AI trade came into full focus at the start of 2023. Its continued earnings strength has been a major source of belief in this trend. If it disappoints, the panic will spread quickly. Now, figuring out whether NVDA will disappoint is no simple task. Thankfully, it’s a task Andy and Landon Swan are well suited to. In their Earnings Season Pass advisory, Andy and Landon use advanced fundamental and sentiment metrics to give their readers an edge on trading earnings releases. And just a couple days ago, they shared their thoughts on NVDA: […] Nvidia (NVDA) came through with our strongest bullish Earnings Score of the week at +58. In January, DeepSeek sent U.S. tech and AI stocks into turmoil when it launched its open-source AI model capable of rivaling the most powerful competitors on the market at a much lower cost. The Chinese startup claimed it achieved advanced AI performance using 2,048 of Nvidia’s H800 GPUs over 57 days at a cost of under $6 million – reportedly 95% cheaper than OpenAI’s models. NVDA shares plummeted in what we believe was an overblown reaction. Today, Nvidia stock has almost fully recovered from that sell-off – and LikeFolio data suggests it’s setting up for a move higher on this week’s earnings report. (Nvidia reports this Wednesday, Feb. 26, after market close.) They go on to show how their unique metrics inform their bullish tilt on NVDA earnings: For smaller companies, Nvidia’s mid-tier GPUs like the H800, along with its cloud-based AI infrastructure, provide accessible options for building and deploying AI systems without the need for massive upfront investments. For larger companies, Nvidia’s high-end GPUs remain essential for staying ahead in the AI race. Capex (capital expenditure) spend on AI infrastructure has already been growing at a blistering pace, with CEO Jensen Huang recently confirming demand for its Blackwell platform is “staggering.” LikeFolio web insights support strong demand – Nvidia digital traffic is up approximately 20% year-over-year. Now that the stock has pulled back from January 2025 peaks, this earnings event offers better upside that we can play to our advantage. As part of their Earnings Season Pass, Andy and Landon recommended what’s called a “spread” trade – where you open two options positions simultaneously, one short and one long. This limits both your upside and your downside, while also greatly reducing the risk of the position. As we showed you last week, Andy and Landon have been nailing this earnings season, with gains of 109.57% on Robinhood Markets (HOOD). LikeFolio had signaled that its web visits had doubled from last year’s levels, and Robinhood was likely to benefit from crypto trading activity in Q4 as bitcoin raced to $100,000. And as per the usual Earnings Season Pass strategy – that trade took only three days to pay off. Finally, don’t miss your chance to tune in to TradeSmith’s newest research breakthrough… By and large, the TradeSmith team has concluded that the last two years’ above-average returns were no one-off anomaly. We could see it happen again this year. And maybe even for several years. But the other side of this coin is that, eventually, there will be an epic meltdown that could take a huge chunk out of your returns… possibly reversing most if not all of the melt-up move altogether. So, our CEO, Keith Kaplan, led our research team in developing a new indicator of when a melt-up has run its course and a meltdown is on the way. In addition, he developed a strategy that isolates deep sell-offs in quality stocks, and then buys those stocks to trade the rebound for 21 trading days. It boasts a near 80% win rate and an average return, counting wins and losses, of just under 16%. All of this will be part of a free research demo airing this Thursday at 8 p.m. ET. There, Keith will: - Demonstrate how he uncovered the mega melt-up signal.
- Explain how he’s preparing our users to take advantage of it.
- Give out the names of 10 stocks poised to thrive in the melt-up, and 10 stocks to steer clear of… completely free.
Keith wants you fully prepared – as this could well prove to be both the biggest wealth creation and destruction event for many, many years. If you play it right, you could walk away at just the right time… escaping with massive gains before the big crash wipes most investors out. Click right here to sign up and get the full details on Thursday… To your health and wealth, 
Michael Salvatore
Editor, TradeSmith Daily | 
