One look at the chart tells you all you need to know…
That’s the Nasdaq Composite, and you can see a clear turn south (circled) at 2:45 p.m. yesterday, precisely when Fed Chair Jerome Powell was holding his press conference after the central bank left interest rates unchanged.
That wasn’t the problem. Everyone expected it. The problem was Powell’s statement that rate cuts are “probably not the most likely case” for the next meeting in March.
Still, the tech-heavy Nasdaq rebounded some today, and is now down about 1.5% from its 52-week high on Monday.
Tech has led this massive rally going back to late October, and it led the charge most of January until pulling back. The shallowness of the dip illustrates the strength of the market.
In fact, I wouldn’t have minded a bigger dip – which we are likely to see anyway. That dip should be one of our best buying opportunities of the year, because the data points to much more upside beyond that.
A Tad Too Hot
Stocks as a whole remain “overbought” after their huge run these last three months. It’s been great, and I hope you’ve made some money along the way.
For instance, our TradeSmith Investment Report portfolio has jumped more than 21% in that time. That’s two years of market returns in just three months, which works out to over 80% annualized.
We ride it while we can, but we also know that stocks are overheated.
I’ve shared my Big Money Index (BMI) with you before. It’s part of my Quantum Edge system, and through years of live data and back testing, it is the most reliable market indicator I know of.
It’s also a fantastic proxy for unusual money flows – the money that moves stocks. It’s unique, unavailable anywhere else, and stunningly accurate at pinpointing the market’s pivot points.
The BMI popped into overbought (the dotted red line at 80) on Dec. 14, and has stayed there ever since. That’s much longer than average.
Source: MAPsignals.com
A reading over 80 means that over the preceding 25 days, more than 80% of the Big Money signals detected by my system are buys – and therefore less than 20% are sells.
The kind of buying is not sustainable, and the BMI did dip to 82.2 yesterday (my computers will generate the latest data overnight), which is getting closer to falling out of overbought. We should expect softness when it does fall back under 80.
That said, don’t be afraid of a pullback. It should be temporary, and my data shows that in the 72 times the BMI has become overbought, the S&P 500 was higher one, three, six, nine, and 12 months later.
When stocks begin to reset to more sustainable levels of buying and prices dip, it’s a time to consider taking profits and rotating your winnings into the highest-quality stocks that are off their recent highs and have the necessary characteristics of future upside. I call them the Quantum Edge trifecta – 1. Strong fundamentals; 2. Strong technicals; and 3. Big Money inflows.
This should be a strong buying opportunity because the data convincingly points to much higher prices as we head through the year.
3 Huge Catalysts for Rest of 2024
1. Inflation is under control.
I know the Fed keeps harping on that 2% inflation goal, but I think a lot of that is rhetoric – another weapon in the bank’s arsenal to try to influence markets and behavior.
Inflation has fallen dramatically – more than 60% from its brutal peak of 9.1% (in June 2022) to 3.4% currently.
That 3.4% is lower than the average of the last 63 years. I dug into the data myself, going back 63 years to when the Consumer Price Index was created. The average reading is 3.77%… and the S&P 500 gained more than 46,000% during that time span.
The economy and stocks can prosper just fine at the current rate, and I don’t think the Fed will stay in militant inflation-fighting mode until it hits exactly 2%.
2. Interest rates will come down – and have already started to.
The Fed Chair may have poured cold water on rate-cut hopes for March (though I don’t think it’s off the table yet), but Powell did acknowledge yesterday that cuts are coming:
We believe that our policy rate is likely at its peak for this tightening cycle, and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.
Besides the vanishing need for higher rates, an equally compelling reason for lower rates is the current abnormal relationship between inflation and rates. The effective Fed Funds rate (the one set by the Fed) is two full percentage points higher than inflation, a huge spread that historically doesn’t last long – meaning rates will fall.
And indeed, the market isn’t waiting for the Fed. Rates are already coming down.
The 10-year Treasury yield, which rose to nearly 5% and ignited much of the volatility from August through October, has fallen four consecutive days – which includes Powell’s comments about the lack of rate cuts. The 10-year yield has dropped to 3.88%… and stocks soared.
We also learned today that the average rate for a 30-year mortgage fell to 6.63%, more than a full percentage point off its peak of 7.79% in October. That has sparked hopes of a stronger spring real estate market.
3. Falling rates mean the “cash bubble” will burst with money flowing into stocks.
If cash is fuel for stocks – which it is – then the market is gassed up and ready to go.
Jittery investors fled to cash in 2022 and parts of 2023, more than any other time in history. As a result, uninvested cash has reached epic levels. As of the last report, it’s still at an all-time high of $6.1 trillion dollars.
As rates fall – both on their own and when the Fed opens the flood gates by cutting – that massive mountain of cash won’t earn as much interest. That’s a huge incentive to get back into stocks.
And when stocks start to move – or I should say continue to move – FOMO (“fear of missing out”) will kick in, pulling more cash off the sidelines. FOMO may have become part of our language thanks to its use in social media, but fear of missing out has been present among investors since the beginning.
The way to beat FOMO is what we might call BIBO – “be invested before others.”
Be Ready to Buy
Any upcoming pullback should be a terrific opportunity to get positioned ahead of this cash bubble bursting.
There may also be good opportunities in stocks that don’t pull back but are set to continue marching higher.
Either way, you want to invest in the best-positioned stocks with Big Money flowing into them.
These are those top-ranked stocks in my Quantum Edge system with muscular fundamentals, strong technicals, and inflows from hedge funds and institutions.
They are the best stocks to own anytime, but especially when Big Money’s spigots are wide open and the cash is flowing even more than usual.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
