STP Algo Trader - Market Insights

When we look at ways to make money in the stock market, we see two different methods of making money.

The first – and most common – is what we refer to as INVESTING. This is where we aim to hold a stock for an extended period and benefit from its appreciation. This is a bet on a company and its long-term success.

In our thirty-year career, we have found this to be most successful when you aim for big returns and then do little around the stock. Don’t trade at all.

The other – and less common – method is what we refer to as TRADING. This is where we aim to capitalize on fleeting opportunities that arise in the stock market.

The analogy we use most often here is the game of blackjack.

In our TRADING strategies, we aim to only make a bet at a table where we know that we have a high probability winning hand.

This is the basis of our algorithmic trading system – Signal Trader Pro. We analyze almost 1400 stocks every day to find opportunities that we see emerge in the markets.

Over the years, this system has been highly successful, with annualized returns ranging from 30% to 50% and an exceptionally high hit rate.

Recently, though, we have seen a big transition. We went from a stock market (in April) where we saw dozens and dozens of signals to a stock market (in May) with almost no new signals.

This is natural when we see strong rallies in the stock market with great breadth.

These types of rallies are great news for stocks in the coming months (and year) but present far fewer high-probability trading setups. These periods, however, never last.

Eventually, we begin to see new opportunities emerge.

In fact, our experience has shown us that the longer we go without many opportunities, the more—and higher–quality—opportunities will emerge.

We think right now we are setting up for an explosion in these opportunities.

What is the basis of our view?

We are focused on the upcoming earning reporting season.

One of the major contributors to the recent rally in stocks was that, overall, companies not only showed strong earnings growth but also handily beat analysts' expectations.

Below are a few charts from the Robinhood trading app’s media arm – Sherwood media.

This chart shows the growth in revenues and EPS for Q1 2025. On the chart, you can see that we saw the BEST EPS growth in the last two years…

The following two charts also show the direction of the analyst's revisions. May saw estimates going HIGHER for the first time in many months…

We believe this occurred when the dynamics of macroeconomic volatility intersected with the way analysts compiled their estimates.

Given all the "news" about tariffs and their impact, the analysts felt obligated to trim cut their numbers. The reality, however, was that this "news" had not really permeated the economic reality of the companies.

While it made sense for analysts to cut numbers, they did so too soon.

This set the companies up to beat these estimates handily. Tariff impacts WILL hit them, but they really didn't in Q1 2025.

Remember, the quarter ends at the end of March, and Trump's "Liberation Day" was not until April 2, the end of the quarter.

We think this will be in sharp contrast, however, to what we are going to see in the upcoming earnings season.

The volatility in the tariff situation means that many companies will likely experience volatility in their earnings results.

The analysts may also feel burned that they previously lowered their numbers and were wrong. As a result, they may be more hesitant to cut numbers this time as quickly.

This is all excellent news for TRADERS because we think we will see many high-quality companies, which have been trading higher with no rest for a month now, present attractive trading opportunities.

The even better news is that the intermediate-term outlook for the stock market remains strong. The substantial breadth during this rally and its speed confirm that we remain in a BULL market. This is why we returned our system to its "BULL" positioning a few weeks ago.

While earnings volatility may give many investors a headache, we think they are going to deliver us some awesome opportunities.