It’s party time!
Last week was a little bumpy, but the S&P 500 has been hot here in the first six weeks of the year – so hot that, if the torrid pace continues, the stock-market bellwether would blaze its way to a 65.9% windfall for all of 2023.
That would blow away just about every single record on the books.
And it would continue to prove a market prediction that I made way back last year.
Let’s look at that prediction … look at what comes next … and see how we can profit from it.
Let’s start with my stock-market call.
Look, I’m probably more bullish than 95% of investors. I’ve felt a little lonely at times – going back to last fall, when I started telling my Quantum Edge Pro readers to get ready for a fun and profitable year.
The story is unfolding exactly as I predicted, and I continue to believe this will be an opportunity-filled year.
But you and I both know how crazy a 65% surge in the S&P 500 would be.
And we know that rallies don’t play out in a straight line.
I’m now seeing signs that this stock-market party may soon hit the “pause” button, and maybe even pull back in the short term.
If that does happen, we want to be ready to pounce – but only on the “right” stocks.
And guess what? Some of the stocks that have shot out of the gate here in 2023 are not the right kinds of stocks.
A lot of this year’s early winners are flawed. Investors who stick with them could be left hungover – and holding the punch bowl.
Let’s look at three of those hangover stocks right now. I’ll show you how to identify the trouble spots. And then I’ll double back to tell you about one stock that’s exactly the right kind to own…
The “Trash” Is Rallying
If you’re not familiar with my Quantum Edge system, it processes and analyzes massive data sets each and every day. That gives us the lowdown on a company’s fundamental and technical strength. And it detects any unusually heavy buying or selling.
These three analytics are the best predictors of what a stock will do next. Stocks that rate the highest – as measured by my Quantum Score numerical-ranking system – are the absolute best ones to buy.
I also programmed my system to calculate what I call the Big Money Index, or BMI for short. It is the 25-day moving average of unusually big buys and sells for stocks and ETFs. The Big Money players are mostly hedge funds and other institutional players who account for 70% to 90% of all trading volume most days.
Just last week, the BMI popped above 80, which put it in overbought territory for the first time since last August. Both the BMI and the SPDR S&P 500 ETF Trust (SPY) sold off – before rebounding and surging higher in October.
I want to be very clear that an overbought BMI doesn’t guarantee an imminent pullback. In 2020, as the markets and economy were rallying after the COVID-19 shutdown, the BMI stayed up in overbought territory for nearly three months. And yet, there was a lot of money to be made in that time.
The high BMI is one sign that stocks may need a breather. Another is what some investors would call a “trash rally.”
That means lower-quality stocks are posting the biggest gains. We see this a lot after brutal downdrafts. These “trash” stocks suffered horrid beatdowns during the free fall. And even the shares of fundamentally flawed companies can bounce back strongly after heavy selling.
But will those rebounds last?
Let’s take a look.
Here are some of this year’s highest fliers (after weeding out penny stocks and microcaps). If you look closely, a definite theme emerges …
The rally looks big on a year-to-date basis.
But when you take a step back and survey the charts on a 12-month basis, a very different story takes shape.
Used-car player Carvana (CVNA) leads the pack with a year-to-date surge of 152%. But that follows one of the most devastating wrecks I’ve ever seen in a stock: CVNA skidded from $230 to $4 – a 98% plunge.
The online-only car seller has those cool “vending machines” where customers pick up their cars; but investors aren’t feeling that coolness.
Peeking into our Quantum Edge system, we see CVNA’s Quantum Score is a sputtering 53.4 – well below where I would buy a stock. And if it weren’t for the recent rally – which bolstered the stock’s technicals – that number would even be lower. Its Technical Score of 67.7 is pretty good, but that’s more than offset by the weak Fundamental Score of 37.5 due to shrinking sales and earnings, high debt, and negative profit margins.
We’ve got a similar story with Peloton (PTON). After crashing 78% in 2022, shares of the connected-exercise-equipment player have muscled up to an 86% gain so far this year. The Quantum Score of 53.4 is a carbon copy of Carvana’s. But it rates even weaker, with a wimpy Fundamental Score of 29.2. Sales and earnings are shrinking, profit margins are down, and debt is high.
Wayfair (W), the online furniture seller, is up a similar 76% this year – following an 83% plummet in 2022. Earnings are falling, profit margins are practically nonexistent, and one valuation measure I like (enterprise value/earnings) is way too negative.
The year-to-date leader list is stuffed with similarly flawed companies whose shares were hammered last year because of those unhealthy businesses. Betting that these dark horses will continue to run isn’t what I’d characterize as a smart wager.
In fact, if I’m sitting on gains in these stocks, I’d be tempted to take my money … and run.
This Is the Kind of Stock You Want to Buy
But that’s not a decision I have to make – since these aren’t the kinds of stocks I buy.
They lack the fundamental underpinnings – the strong finances – to attract Big Money muscle. Yes, big rallies are possible – often ignited by short-sellers covering their bearish bets. But those rallies can fizzle just as quickly as they begin.
You’re better served buying the soundest companies (strongest fundamentals) whose shares are also moving higher (strongest technicals) and getting scarfed up in unusually high quantities (Big Money).
I’ll give you “taste” of just such a company – one I’ve recommended in my Quantum Edge Pro trading service. That company is fabless chipmaker Allegro Microsystems (ALGM), which has a sky-high Quantum Score of 89.7 right now. Allegro’s shares have zoomed 42.5% already in 2023. It’s in one of the hottest sectors – high tech. We’ve locked in nice partial profits and are holding on to most of our shares and it has the ingredients needed to keep moving higher.
ALGM’s Fundamental Score of 83.4 is downright outstanding. The company has strong sales-and-earnings growth, juicy profit margins, low debt, and a still-attractive valuation – even after the run.
And to put some icing on this silicon-wafer cake, Big Money has been scooping up shares these last three months – which you can see with all of the green bars.
Fundamentals … technicals … and Big Money.
All my research – bolstered by years of backtesting – proves that stocks featuring these three strengths are the stocks you want to own. They give you the best shot at making money. They also have the lowest odds of flaming out – which is what I see happening for the hottest “trash” stocks like the ones I’ve spotlighted here today.
Buy quality, ride them higher, take profits when my system tells you to – and then do it all over again.
You can’t go wrong when you’re “stacking wins” – taking win after win using my Quantum Edge signals.
Editor, Jason Bodner’s Power Trends
P.S. I would be very leery of chasing some of these stocks that have posted big gains in 2023. The ones we talked about today are smaller companies, but some bigger companies are also problematic. Be sure to check out my latest special report, “Portfolio Killers: The 15 Toxic Blue-Chip Stocks to Sell Today,” just for you and your fellow Power Trends readers. Wall Street’s “Big Money” crowd is avoiding these shares – so why risk holding them yourself? Click here to access your special report now.