My readers and I have had the decorations hung and the punch bowl out for a while now, and it looks as if more guests are arriving at the party… before the real throng follows.
Jerome Powell didn’t say the Federal Reserve was done raising rates, but investors are increasingly coming around to my view that the rate-hike campaign that began 20 months ago is likely done.
That’s a potentially huge catalyst for the end-of-year rally I continue to expect, so there’s still time to get into stocks that are best-positioned to lead the coming surge.
It’s human nature to want to wait for “official” word from the Fed that no more rate hikes are on the way, but even a quick look at history shows that some of the biggest gains come long before the actual news.
Think back to the most recent recession in early 2020 when COVID-19 emerged and much of the nation – and the world – shut down. The National Bureau of Economic Research declared that the recession lasted from February to April 2020, making it the shortest recession on record. They made that declaration on July 19, 2021… more than a year after the recession had ended. Anyone waiting for that “official” word to get back into stocks missed one heck of a rally – nearly 80% from the bottom.
The market is a “forward-looking mechanism,” which is fancy language for saying that investors put their money to work based on where things will be, not where they have been.
But I’ve yet to see a real crystal ball, fortune teller, tea leaves, astronomy chart, or anything else that accurately predicts the future.
So what’s an investor to do?
Rely on data.
Specifically, the right data. My data shows that stocks have a 100% historical chance of rallying from current conditions.
And it also shows which stocks to pick to profit from the coming rally.
3 Data Points Indicating Profitable Days Ahead
I expected stocks to strengthen in October, and that, of course, didn’t happen.
But data shows that November and December are historically stronger than October – and a 3% bump in the S&P 500 in just the first two trading days of the month is a nice start. Other developments increase my confidence that the rally is ever closer.
1. Investors believe more than ever that the Fed is done raising rates.
Even without official words, investors are putting the pieces of the puzzle together and betting that rate increases are over. Investors see an 80% likelihood that the Fed will leave rates alone at the December meeting, according to the CME FedWatch Tool.
That’s a big shift. One month ago, investors were pretty evenly divided – just a 54% chance that rates would stay the same.
2. Bond yields are falling.
Another important but somewhat overlooked development came from the Treasury Department, which said it needs to raise less money than anticipated – $76 billion less. That helped ease some fears over out-of-control spending and soaring debt, and it helped bring yields down.
If yields have peaked – particularly on the 10-year and 30-year bonds – a significant pressure should be lifted off the market.
3. Growth stocks are leading again.
When growth stocks lead the market, it’s usually a good sign of things to come. Investors avoid growth when they are feeling too skittish, but they embrace it when it’s time to make money.
The Invesco QQQ Trust – called “the Qs” because of its symbol – rose 1.7% yesterday and another 1.8% today. It has actually posted five straight up days, gaining nearly 6% in that time.
These are the largest non-financial companies listed on Nasdaq – Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Nvidia (NVDA), Meta Platforms (META), Tesla (TSLA), and Alphabet (GOOGL). You get the picture.
A lot of growth stocks got hammered in all of the selling after leading the way higher much of the year. Investors returning to these stocks show an increasing appetite for profits and tolerance of risk.
And the Biggest Data Point of All…
I’ve mentioned this to you before, but the indicator I am most confident in is my Big Money Index (BMI).
I designed the BMI part of my Quantum Edge stock-picking system. It tells me exactly what the Big Money is doing – the money that moves markets and stocks – by measuring unusual buying and selling. The BMI (amber line below) went oversold the first week of October. This happens when 25% of the signals in my system are buys and 75% are sells. It marks an extreme level of selling that isn’t sustainable.
The BMI continued to fall to levels we haven’t seen in a while, so I did a study on the BMI below 19 and what it means.
I felt much better afterwards. When the BMI dips to those extreme lows, the odds of higher prices increase, and so do the percentage gains.
The BMI has been 19 or below 18 prior days since 2016, and the S&P 500 was higher one, three, six, nine, and 12 months later every single time.
And the average returns are stunning:
- 1 month later: +12.1%
- 3 months later: +19.8%
- 6 months later: +28.0%
- 9 months later: +38.2%
- 12 months later: +47.6%
And if that’s not convincing enough, here’s an even bigger data set. Going back to 1990, I see 129 instances when the BMI was below 19.
And guess what? Stocks were higher one-year later all 129 times with the S&P 500 averaging 24.7% gains.
You Can Still Be Ready
It’s been a bumpy few months, so I understand the impulse to just step aside while stocks chop around. I have to fight that impulse myself.
The way to do that is to rely on data and not emotions – like fear in bad times or greed in good times. An investing plan dictated by logic and informed by data avoids these mistakes.
That’s why I designed the Quantum Edge system.
The further our BMI falls, the more certain the upside becomes. Stocks are almost guaranteed to rally, and rally even higher.
Now is the time to own the stocks mostly likely to lead the way up – the best stocks with the strongest fundamentals, technicals, and Big Money inflows. These stocks will rally furthest and fastest, and they are the stocks we are positioning ourselves in now in my Quantum Edge services.
Some of these stocks are trading at juicy discounts. And though it may not feel like it, history shows that now is the time to take advantage, and data shows that we’re getting ever closer to higher prices.
Jason Bodner’s Power Trends