Even experienced pros aren’t quite sure what “capitulation” looks like.
We talked about it in the last Power Trends – “After the Pains Come the Gains” – and I said it’s when everyone even thinking of selling has had enough, throws in the towel, and dumps stocks.
It’s the bottom, or at least the bottoming process. Next comes the rebound rally.
Market watchers and investing pros talk about capitulation all the time in down markets, but it’s a very squishy concept.
I’m a data guy, so “squishy” doesn’t cut it for me. Neither does guessing or intuiting.
In fact, I’m currently writing and editing a white paper at my research firm to put some texture on capitulation.
To be clear, I’m not talking about picking an exact bottom.
That’s a fool’s game… and you’re pretty much guaranteed to be wrong.
But you don’t need to pick the exact bottom to make a lot of money on the rebound.
It always starts with the highest quality stocks in the market that have superior fundamentals, strong technicals, and Big Money flowing in. Then you buy them well off their highs, whether the stock itself or the market as a whole has bottomed or not.
And then you ride the rebound.
We’ve been doing that for a while now in my Quantum Edge services, but more data points tell us that investors are throwing in the towel and the turn higher is imminent.
In other words, the data screams “buy” right now.
Data Point #1: The Big Money Index Is Officially Oversold
I told you in Thursday’s Power Trends that my proprietary Big Money Index was nearly oversold.
Oversold means that selling has reached extremes that aren’t sustainable, so an up move is virtually certain.
Well, we’re there. The BMI officially became oversold after Thursday’s trading. It’s now sitting right on 25, which is oversold indicator line (green dotted line).
Just like it did one year ago… and just like it nearly did in March. Both were strong buy signals as the S&P 500 (blue shaded area as measured by the SPY) shot higher.
You know I wouldn’t be satisfied with just one year of data. It’s not a big enough sample to be reliably predictive. But this pattern is consistent with the last three decades of data.
The BMI has been oversold 24 times since 1990, and the S&P 500 was higher six months later just about 80% of the time with an average gain of 9.1%. Individual stocks – the best stocks with qualities I mentioned above – did better.
Data Point #2: Sellers Dominate and Buyers Hide
One of the cool features of my Quantum Edge system is that it detects unusual buying and selling in stocks. That’s the Big Money at work – the money that moves stocks.
The current BMI reading of 25% tells us that one quarter of the signals my system sees are buys, and three quarters are sells. That calculation is a 25-day moving average.
If we look at individual days, we see even more dramatic data. Sellers are in complete control.
Monday and Tuesday of this week were some of the most lopsided days of the last 12 months. Monday saw 274 Big Money sell signals to just 7 buy signals. And Tuesday was indeed the most selling dominated day of the last year with 347 sells and only 2 buys.
That’s about as extreme as selling can get, and it signals that the end is near.
Data Point #3: All of This on Big Volume
Lastly, I look to see if all of this is happening on higher-than-usual volume.
Quite simply, you can’t define anything on low volume. That’s what makes the summer months so frustrating and unpredictable.
But now, we have an oversold BMI, days with tons of sellers and no buyers, and on increased volume.
Volume on the New York Stock Exchange Composite Index has been above average six of the last seven trading days coming into Friday.
And guess what the two biggest volume days were?
Yep… Monday and Tuesday, which also had the most Big Money sell signals.
It’s further capitulation confirmation.
The Best Time to Buy
I’m not here to predict the bottom.
It might have been Tuesday’s lows, or we might go lower next week.
I am here to be sure you know that highly predictive data tells us stocks are about to turn higher.
This isn’t a data point, but I am also getting more calls and texts from friends and associates who are increasingly worried and wondering what’s next. It’s another classic sign that fear is reaching its peak and about to reverse.
And that turn is coming at the strongest time of the year for stocks.
It’s a powerful setup for a lights-out fourth-quarter rally.
Next week also kicks off the next earnings reporting season, which should add more fuel to the fire.
I’m not trying to be overly dramatic, but these really are the times that separate the most successful investors from everyone else.
It’s one of those upside-down truisms – the best time to buy is when it feels like the worst time to buy.
We’ve been buying for a while now in my Quantum Edge services, and I like how we’re set up for what’s to come.
But we’re not done yet. In fact, we’re likely to get more active.
We’re focusing on the top-rated stocks in my system – stocks with the highest Quantum Score driven by those powerful fundamentals (business strength), strong technicals (trading strength), and Big Money inflows (institutional support).
And if you want to narrow your search further, I expect the coming rally to be led by tech stocks, and I expect heavy buying in small and midcap stocks. The highest-rated stocks in those areas are positioned for the biggest bounces.
But you have to invest soon if you want to go along for the ride.
If you want my help, you can click here now to learn more.
Enjoy the rest of your weekend. Next week should be very interesting.
Jason Bodner’s Power Trends