Things are pretty glum out there.
September was the worst month of the year for stocks.
The Dow Jones Industrial Average just had its worst day since March… and closed on Tuesday down for the year.
Treasury yields hit 16-year highs – which pressures stocks.
Mortgage rates shot up to 20-year highs – and applications for new loans just fell to its lowest level in 27 years.
There’s a lot to be confused about and very little to be excited about… unless you can see what’s coming.
Fortunately, my Big Money Index (BMI) is really good at doing just that.
Even better, it’s indicating that a potentially explosive rally is just around the corner.
And there’s still time to get ready…
Inching Closer to a Reversal
The old mantra – “It’s always darkest before the dawn.” – applies to stocks and markets as well.
Things seem to get worse before they get better, ultimately leading to what we call “capitulation.” Or a more satisfying term would be a “flush.”
That’s when everyone even thinking of selling has had enough, throws in the towel, and dumps stocks.
It’s painful, yes. But it usually doesn’t last long. The number of sellers soon dwindles, buyers regain control, and stocks rally – often higher than they were before.
That’s the thing about capitulation. Sellers just, well, sell. No thinking required.
It’s an emotional response, not an analytical one. And it means even the best stocks in the market trade at a big discount to where they were just a couple of months ago.
Those are the buying opportunities available right now.
But probably not for much longer. My BMI is showing that we are likely within a week – or possibly a little more – before that final flush gives way to a potentially lights-out rally into the end of the year.
The BMI is a powerful and highly accurate predictor of market direction. Its origins go back to my days managing a trading desk a matching up institutional buyers and sellers. Millions of shares worth many millions of dollars passed through my hands day after day.
I had a rare view that not many folks have to see firsthand how Big Money moves stocks – and markets. I learned how influential those massive money flows are. And my view from the inside taught me how to decipher trading data to detect the unusual buying and selling that institutions and hedge funds work so hard to keep quiet.
My M.A.P. System that we use in my research firm and my Quantum Edge investing services measures these unusually big buys and sells on individual stocks. Buy a stock with huge inflows and you have a high probability of making money.
My system also measures these signals on sectors and the market. Turns out they are as good at predicting sector and market moves as they are stock moves.
The data and algorithms are complicated, but the idea is straightforward. My system compiles all instances of unusually big buying or selling every trading day. I call these Big Money signals or chaos spikes. It then calculates the 25-day moving average of those signals and expresses them as a percentage that are buys.
As of today, the Big Money Index stands at 28.1%. That means 28.1% of all Big Money signals over the last 25 days have been big buys. A quick calculation tells us that 71.9% have been sells.
Notice how sharply the BMI has fallen since the end of July. The S&P 500 has fallen 7.5% in that same period.
With more than 70% of current signals being sells, the BMI is almost as lopsided as it gets.
Study any dataset for any period of time and you realize that nothing stays lopsided. Which is why this is such an important time for investors.
The data shows we’re very close to a reversal.
A Reliable Predictor of Big Returns
You’ve probably heard stocks and the market described at times as “overbought” or “oversold.”
Overbought means buying reached an intensity that can’t continue, so a down move becomes virtually certain. Oversold means that selling has reached extremes that aren’t sustainable, so an up move is virtually certain.
I determined that a reading of 25% signifies an oversold BMI. It’s marked by the green dotted line on the charts above and below.
Why green? Because it’s a screaming buy signal!
I marked up the chart to show you what I mean. The BMI (yellow line) hit oversold (the dotted green line at 25%) last October, and both it and the SPDR S&P 500 ETF (SPY, the shaded blue area) quickly reversed into a huge rally that lasted nearly four months.
Not coincidentally, the rally peaked almost as soon as the BMI signaled overbought (the dotted red line at 80%), which is a sell signal. (And we actively took profits in my Quantum Edge Pro service.)
Also important: We don’t need the BMI to “officially” hit oversold for a rally. It dipped to 29 at the end of March – about where it is now – and then launched into that rally that took us to the end of July – an 18% juicer!
I marked the market (SPY) declines with the red line and the rallies with the green line. What do you notice? The green lines are significantly longer; the rallies are much more powerful.
But that’s not just this year. This is consistent with the last three decades of data. The BMI has fallen to oversold 24 times since 1990. Over the following six months…
- Stocks (the S&P 500) were higher 19 times, or 79.2%. And of the five times they weren’t higher, four were in 2007 and 2008 during the recession and financial crisis.
- The average gain is 9.1%, which is a full year’s worth of average returns in half the time.
- In those 19 instances when the S&P 500 was positive, the average gain was a stellar 15.2%.
Adding fuel to the coming launch, stocks are setting up for their reversal at the absolute best time – the strongest time of the year.
The fourth quarter is far and away the time to own stocks. Not only are the next three months the best stretch of the year, but they also have the highest predictability with 70% historical accuracy.
This data doesn’t involve guesswork – like trying to figure out what’s next for inflation, interest rates, the economy, the government, or anything else that’s in the news these days.
All that is mostly noise that will not get in the way of what this data is telling us.
The BMI trendline indicates a reversal is coming at a time that signal lines up perfectly with the market’s well-defined seasonality.
I expect the coming rally to be led by tech stocks, and I expect heavy buying in small and midcap stocks. Those are the most beaten-up, and as with the BMI, the strongest of those oversold stocks are set for the biggest bounces.
Those are the stocks you want to own.
Jason Bodner’s Power Trends
P.S. We took advantage of lower prices again this week by adding a high-quality tech stock to our Quantum Edge Pro portfolio.
It’s owned almost entirely by institutions, so it’s a Big Money favorite. And it has the strong technicals and fundamentals that we also look for.
It has dipped even more since we bought it, which makes it an even better buy right now.
That also includes my favorite play on the massive AI boom that has already created $5 trillion in new wealth.