Last week, U.S. equity funds had their second-biggest weekly exit on record. According to Bank of America Merrill Lynch, $27.6 billion left these funds.
The only bigger outflow was in March 2018. Unsurprisingly, the market bottomed out shortly after on April 2.
The current negative sentiment is showing no signs of dissipating, either…
The Dow Jones Industrial Average fell about 2.2% on Monday, and the S&P 500 fell 2.1%. Both are in correction and on pace for their worst December performances since the Great Depression in 1931.
Investors are panicking. And like sheep, they follow the herd.
But is it time to sell your stocks and flee to safe-havens like cash, bonds, or gold?
Here at the Daily, we don’t want you following the herd to financial ruin. So today, I’ll show you three indicators I’m watching… They’ll determine if I’m about to join the sheep in losing money—or go against the herd to make money.
Most Investors Don’t Beat the Market
For the past quarter-century, market research firm Dalbar has conducted a survey called “Quantitative Analysis of Investor Behavior.” According to the survey, the average investor’s portfolio grows just 4% per year—compared to a 10% return per year for the S&P 500.
In other words, the average Joe underperforms the market by six percentage points (a staggering 60%) per year.
There are countless reasons for this. But I think a lot of it comes down to human psyche.
Let me explain…
When times are good and the market is rolling, average investors see stories about stocks that soar by triple and quadruple digits. Or they hear tales of people who get rich in the market and are buying Lamborghinis and McMansions.
The average Joe thinks he needs to put his money in the market, too. After all, those bozos on TV aren’t any smarter than he is… or so he thinks.
So he piles in. But it’s almost always near the top.
When the market inevitably turns, the average Joe begins to wonder what’s happening in the world. He turns the TV on to the financial news and sees something like this:
So he sells after losing money. He becomes a sheep following the herd. (And I say “he” because multiple studies show that women outperform men in the markets.)
But if you don’t want to become one of these sheep and sell at the wrong time, here’s what you need to look for…
These Three Indicators Signal “Buy”
Honestly, the best thing you can probably do as an investor is to turn off the news, read one or two financial newsletters that you trust, and look at a few indicators.
Right now, I’m watching three.
The first is a contrarian indicator: outflows. As I mentioned above, outflows are near records highs. However, when the market is this oversold, that usually means it will reverse higher… Extreme selling can only happen for so long. So bet on a turnaround.
A second indicator I trust is colleague and Palm Beach Trader editor Jason Bodner’s proprietary system. Longtime readers know that Jason’s system tracks nearly 5,500 stocks every day to find the best of the best that institutions are likely buying.
But his system also tracks unusual institutional (UI) activity in the broad market. It takes all the stocks with UI buying and divides them by the ones with UI selling to create a ratio.
Right now, his ratio is showing that oversold conditions are almost done. That means the downturn is nearing an end…
And the third indicator I’m watching is the Volatility Index (VIX)—commonly referred to as the market’s fear gauge. It’s another contrarian indicator.
When the VIX goes up, investors are more fearful. But so far this year, whenever the index has spiked over 25, the selling soon stops and the market recovers.
And as you can see, the VIX just spiked above 25 again. If the past is an indicator, it suggests that selling is nearly exhausted.
All three indicators are showing that investor sentiment is very negative. And when investors are scared, they leave the market.
But you don’t want to follow the herd to the exits. Instead, identify quality stocks that you like and are selling at discounts. Then, consider adding them to your portfolio.
Buy the shares that the average Joe panic-sells. You’ll be glad you did.
Analyst, The Palm Beach Daily
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