Making Hay on a Cloudy Day By Michael Salvatore, Editor, TradeSmith Daily In This Digest: Let’s wind the clock back to October 2023… That was a special time. I had just begun writing TradeSmith Daily, and the market gods decided to make life hard by nuking stocks. “Go ahead and make hay in the dark!” they jested. The talk of the panic-stricken town back then will sound familiar to investors today – surging long-term Treasury yields. Investors were still scared about inflation and high interest rates back then. As it turned out, they were right to be. Inflation is still a problem not quite solved. High rates were then, and even moreso today, causing problems for lots of very large banks with very large books. At the same time, all the selling and panic was a bit overdone. I recall more than a few X (formerly Twitter) posts predicting no-bid Treasury auctions were right around the corner. So, winking back at the market gods, we made hay on a cloudy day. Specifically, I recommended you take the other side of the trade. That worked out well. The iShares 20+ Year Treasury Bond ETF (TLT) rose 20% from the day I published that piece through the end of the year. So the obvious question is, with TLT once again plunging to its doom alongside stocks, should we “hold our nose and buy” again? The answer is… actually, no. There’s a few things worth looking at on its chart… But none of them are super convincing of a long-TLT play. TLT broke above a falling resistance line back in November as the post-election risk-on rally took hold. Since the start of December, though, it’s continued down to test that former resistance as support: 
So far, support has held. And TLT has held above its October 2023 low of $82.77, which is the next key area of support. We also see a mild positive divergence on the Relative Strength Index (RSI). That’s a higher low in the RSI with a lower low in price – showing us, just like last time, sellers were exhausted at lower prices than before. However, it has nothing on the yearlong divergence we saw back in ’23. One other thing worth mentioning is the simple fact that TLT reached oversold levels a few days ago and has since bounced back above the line. That’s a somewhat rare condition; TLT has fallen below 30 on its RSI only 73 times in more than 5,000 trading days since 2003. The problem is, across all timeframes, this isn’t a reliable signal for TLT: 
I mean, sheesh. I’m not getting out of bed for these numbers. The odds are actually against TLT heading higher in the short term. And longer-term, the odds of a trade worth your time aren’t much better. This isn’t, as Trade Cycles analyst William McCanless puts it, one of those “slap you in the face” trades. And it’s also telling us that the risk-off behavior in stocks may not be quite done. | Recommended Link | | | | A top tech expert warns: “there’s perhaps a few hundred people in the world who realize what’s about to hit us.” Eric Fry is one of them… and he’s started a 1,000 day countdown to prepare for its launch. Click here for 3 steps to take today. |  |
Still, let’s try to make hay on a cloudy day… Markets are closed as I write, in observance of former President Jimmy Carter’s funeral. That’s a good opportunity to dive deeper into just what’s happening in stocks. You don’t need me to tell you stocks are in a sour mood. Santa Claus didn’t come to town, with large-cap stocks falling close to 2% from Christmas Day through the second trading day of the year. That’s a poor omen. (It should be noted that small caps [IWM] outperformed SPY, DIA, and QQQ during this period, trading roughly flat.) You might interpret that as traders going risk-off. But we have another way to test that. If traders are truly risk-off, they’re going to flee to defensive sectors – namely consumer staples. However, they’re not, even with large caps volatile: 
Staples are still in a filthy downtrend against the SPDR S&P 500 ETF (SPY), with the ratio chart above hitting new all-time lows to start the year. Meantime, tech vs. SPY is still in an uptrend, and right at resistance: 
Any kind of recovery thrust in the market today, if substantial enough, could send this chart above that resistance and continue the tech-dominant trend in strong fashion. Finally, let’s look at consumer discretionary stocks vs. SPY. This, to me, has the makings of a new uptrend: 
We last wrote about this ratio pair as it broke out of a multi-year downtrend and set a new two-year high. I’m now watching this like a hawk. Because if discretionary stocks keep outperforming the market, that’s a sure sign of a very strong bull market and a lot of confidence in the U.S. economy. Hidden beneath the red numbers are signs that the bull market still has long legs to run with. We need to dive deeper and pay attention to these signals. The fact is, November was a wild, probably excessively optimistic reaction to the incoming Trump administration. The price action we’ve seen since Christmas is a much-needed breather, a consolidation of that move. While we still see people running away from defensive sectors and running into higher-risk sectors, you want to use this price action as a chance to deploy capital… with the knowledge that the market can still head lower in the short term. Another signal to watch is sentiment… The American Association of Individual Investors released its sentiment survey yesterday, showing the first shift to bearishness since late November: 
We now have more traders bearish on the next six months than bullish. We can confirm this sentiment with the CBOE put/call ratio, which measures the number of put options traded against call options. Higher the line, greater the fear. And unless my eyes deceive me, I seem to be looking at a seven-year high in the ratio, with stocks just 3% from their all-time highs: 
Look closely at the red line. Every time we see a spike in put-option frenzy buying, that marks at least a short-term bottom in stocks. And now we’re seeing the first new highs in the ratio since the October 2023 downswing. These things just don’t compute out to a bear market. Investors are freaked out, and things could head lower. But from where I sit, stocks seem on sale, and we should take advantage. Here’s a great way to take advantage… Whether you want to own stocks or trade them, you should be aware of our Seasonal Edge strategy. By running quintillions of individual factor tests (no joke), our research team honed our seasonal data into a moneymaking machine. Our secret is confirming reliable historical patterns with near-term indicators. Like we just showed with sentiment and put buying, finding the signal within the noise is all about confirming ideas with increasingly precise factors. The result has been a simple-to-follow seasonality strategy that has outperformed the market 2-to-1 since 2006 in our backtest, delivering gains 83% of the time. Right now, our Trade Cycles subscribers are getting signals from this system. And with stocks facing extreme downside sentiment, those signals couldn’t be coming at a more perfect time. Here’s a few words on the strategy from Trade Cycles analyst William McCanless, who I mentioned earlier… All in all, I’m blown away. The setups on these [first few stocks] look amazing, and it’s crazy to think these were automated alerts! Raymond James Financial (RJF), for example, has a whopping 93% accuracy rate of rising 8.3% over the last 15 years from Jan. 3 to Feb. 17 – then when I pull up my price chart, RJF is in a long-term up channel. Although it’s near all-time highs, it recently experienced a dip right around when our new Seasonal Edge system issued a long trade signal. Then we’ve got 11 more potential entries this month from this revolutionary, never-before-seen Seasonal Edge portfolio. (Something NOBODY else in the world has.) I’ve gotten a peek at those upcoming trades myself thanks to the Trade Cycles Calendar. And it’s gratifying to know that 2025 will bring us a wide range of opportunities – no longer constrained by just the Magnificent 7 hoarding all the gains. So please, don’t assume what worked yesterday will continue working. Instead, with Seasonal Edge you have the chance to get in and out of the highest-quality stocks with an overall backtested success rate of 83%, as we’ve shown today. I think 2025 will offer the best environment we’ve seen in years for this kind of short-term, rapid-fire, profit-grabbing strategy. So please: Don’t miss it. Watch the replay of Wednesday’s free webinar on the topic and get involved. To your health and wealth, 
Michael Salvatore
Editor, TradeSmith Daily | 
