How to Trade the “TACO” Effect Without Getting Burned VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - What the “TACO” trade is teaching investors
- This tool solves every big market swing
- How two metrics combine to find great, cheap stocks
Trump has a branding problem… President Trump backed off on his threat to impose new tariffs on eight European countries yesterday. But not for no good reason. As part of an in-progress framework for what happens next with Greenland, Trump and NATO Secretary General Mark Rutte worked out a few key conditions: - A U.S.-commanded NATO force in the region to fend off potential Chinese and Russian activity
- A new economic agreement involving mining rights, also intended to exclude China and Russia
- Amendments to a 1951 agreement that gives the U.S. more leeway in actively defending Greenland alongside NATO
Markets rejoiced, sending the S&P 500 up 1.4% from Tuesday’s lows. Now, you can call this a “TACO trade” – short for “Trump Always Chickens Out” – if you really want to. But I’ll continue to call it what it is: The Art of the Deal. Trump followed the same framework he did during last year’s Liberation Day crash, and what he really has done all his life. - He gets out front with a huge, nigh, unreasonable pitch to pile on the pressure…
- Then, he gets in a room to negotiate…
- And finally, he settles on something much less than he asked for, but that still puts him well ahead of where he started.
Trump is walking away from Davos with a new plan for Greenland’s security and a potential mining deal. Was there collateral damage in the U.S.-European relationship? Probably. Trump decided to break a few eggs to make his omelet, and that’s out of our control. Understand, we’re not looking at this through a political lens… We’d be happier, just as I’m sure you would, that politicking had as little to do with markets as possible. But that’s just not the case. Washington has a big impact on your portfolio. So we need to keep an eye on it. The lesson of the past week’s volatility is simple. When the Trump administration starts breaking eggs, things can get ugly. Tuesday’s price action quickly swung the major large-cap benchmarks to negative territory for the year. But when the omelet is made, you have to be ready for the rebound as well. And you can prepare for both of these moments by minding your risk management strategy. If you’ve followed TradeSmith for a while now, you know that risk management is the bedrock of everything we do. Our flagship software, TradeStops, is designed to keep you in higher-potential stocks longer, while accepting smaller losses whenever things truly get out of whack. It does this by recommending volatility-based trailing stop losses. Stop losses are sell orders that you set lower than the current market price, which will only activate if the stock hits that price. Better yet, with trailing stop losses, the sell order price rises along with your stock position. We take it a step further by recommending these trailing stop loss levels based on a stock’s unique volatility footprint – what we call the Volatility Quotient (VQ). For example, imagine that an old-school, blue-chip consumer staples stock like Johnson & Johnson (JNJ) were to fall 40% from its highs. In that case, something has either gone seriously wrong with the company or the entire market is in a deep bear. That’s because such a swing in JNJ is extremely rare. The last time it happened was back in 1984. That’s why our Volatility-based trailing stop-loss recommendation for JNJ – aka its VQ – is just 13% lower than its current price. At the same time, a stock like Tesla (TSLA) has a much higher VQ of 45%. If you were to sell TSLA on every 13% drop, like you would with JNJ, you’d be constantly in and out of the stock. Swings like that are much more common in such a volatile stock. When you think about your portfolio like this, you no longer get scared out of the market when the eggs start breaking… nor are you rushing back in when the omelet is served. You’re cool, calm, and collected through volatility because you know exactly when to take action. We can even see this in the broad indexes. Despite the S&P 500 falling as much as 2.5% from its all-time closing high on Jan. 12, the number of stocks in the index that flashed new volatility-based sell alerts barely nudged, from 26.95% to 26.8%. Only one stock hit that level – and it’s actually a big one: Microsoft (MSFT). 
The software giant is, according to our system, the only stock we recommend selling out of the S&P 500 since the index’s all-time high. Here’s an even simpler way to dodge this problem… Own great stocks. When you own stocks that outperform the market, you don’t have to worry as much about what the broad market is up to. It’s not easy to find great stocks before they’re headline news – especially if you’re relying on the same kinds of financial tools that everyone is using. But here at TradeSmith, our mission is to create new data analytics and investment software tools that can help you spot these outlier stocks ahead of the crowd. Take our Quantum Score, for example. This quantitative stock rating system crunches countless datapoints – both in terms of company fundamentals and money flows – for thousands of stocks. It rates company metrics such as earnings, revenues, and profit margin growth – key signs of a fast-growing business that will thrive and survive in almost any market environment. It also measures a combination of pure price momentum and unusually strong buying volumes from institutional investors. We then boil it all down to a 0-100 score. The higher the score, the more profit potential a stock has. This is how we flagged Google before it took over the AI trade… Last September, we called Google parent company Alphabet (GOOGL) the “Best and Cheapest” company in the group of Magnificent Seven big tech stocks. Since then, the stock is up 40%. That’s added well over a trillion dollars to its market cap and made it the second biggest company in the world. 
How did we do it? Not by reading the news headlines like everyone else. And we certainly didn’t follow the latest hot take on social media. (In fact, back then the popular narrative surrounding Google was that it was behind in the AI race.) Instead, we simply noted that GOOGL had the highest Quantum Score and the lowest price-to-earnings (P/E) ratio of the Mag 7 stocks. Today, we’ll repeat that exercise – finding the stock with what we see as the best potential based on a high Quantum Score and relatively low P/E. Only we won’t limit ourselves to the Mag 7. We’ll look at the Nasdaq 100, a tech-packed benchmark made up of the 100 biggest non-financial stocks listed on the Nasdaq. When we screen the Nasdaq 100 index for stocks with a Quantum Score of 90 or higher, along with a P/E ratio below the average stock in that index, only two stocks pop up. They are Monolithic Power (MPWR), which makes power-management chips for everything from data centers to electric vehicles and Paccar (PCAR), the company behind Kenworth and Peterbilt trucks. Here’s the current Quantum Score for MPWR: 
MPWR has the second-highest Quantum Score in the Nasdaq 100 – second only to chipmaker Micron Technology (MU), which we looked at yesterday. We can also see that while the Technical score has fallen over the last three months as the share price has cooled off, the Fundamental score has stayed strong over that same stretch of time. It also trades at a relatively cheap P/E ratio of 27.7. Now, let’s look at Paccar (PCAR): 
PCAR’s Quantum Score has risen over the past three months, driven by its higher Technical score. And it’s even cheaper – trading at a P/E ratio of 24. PCAR also has a bullish seasonal window coming up… Check our PCAR’s post-election seasonality chart… 
Between Feb. 5 and March 9, PCAR has been up during the past 12 midterm election years all but once. And on average, the stock has returned more than 7% in that window. Seasonality is a powerful tool in our arsenal. And this week, our CEO Keith Kaplan released a new research presentation that unveiled some big new updates: - Our new Seasonal Statistics page, which lets you dive into monthly, weekly, and even daily seasonal data to hone your trading edge
- An updated Seasonality algorithm that helps you find the most optimal trades
- A brand-new 5-stock portfolio strategy designed to keep you in the best patterns in an easy-to-follow way
The presentation will only be up for a few more days. So if you haven’t seen it yet, I recommend checking it out here. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily Disclosure: Michael Salvatore holds shares of Google (GOOGL), Monolithic Power (MPWR), and Tesla (TSLA) at the time of this writing. | 
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