In the 1998 movie Rounders, John Malkovich plays a Russian mobster and ace poker player named Teddy KGB.
The movie is set in the underground world of high-stakes poker in New York City. And Teddy KGB is the best player in the circuit.
In the first act, a young law student named Mike McDermott (played by Matt Damon) loses his life savings in a poker game to Teddy.
After the defeat, he quits rounding the circuit (hence, the name Rounders). But his best friend Worm starts rounding and ends up owing Teddy, too. Worm has a five-day deadline to pay the $15,000 debt.
So Mike returns to the circuit once more to help Worm. And to beat Teddy, he needs to discover his “tell.” (Fair warning: Spoiler alert ahead.)
You see, Teddy was always a master at bluffing. When he had a weak hand, he’d raise to make it appear it was strong.
But there was one constant with Teddy… No matter what, he always brought Oreo cookies to his poker matches.
When he wasn’t bluffing, he’d break open the Oreos and eat them. But when he was bluffing, he’d break open the Oreos – without eating any.
Once Mike identified this “tell,” he was able to ignore Teddy’s bluffing act. It’s how he wins enough to pay off Worm’s debt.
Sure, it’s cliché. But it’s how the market works, too. It tries to bluff you out of your money.
Some market watchers are bearish right now. For example, Crescat Capital CEO Kevin Smith says stocks are insanely overvalued and disconnected from reality.
And others are bullish. Barron’s says, “Biotech stocks are getting ready to run”… and, “Oil’s rally points to better times ahead.”
So which is it? Bearish or bullish?
Trying to make sense of the conflicting headlines is mind-bending. Fortunately, the market has a tell, too. And today, I’ll share what it’s revealing…
The Market’s “Tell”
There’s no doubt about it… The market is overheated.
I’ve been saying this for weeks now. And my data continues to back it up. Remember, my “unbeatable” stock-picking system scans nearly 5,500 stocks each day. It uses algorithms to rank each one for strength.
And to make sure it’s highly accurate, comprehensive, and effective, I used my experience from nearly two decades at prestigious Wall Street firms – regularly trading more than $1 billion worth of stock for major clients.
But my system does more than just look at individual stocks. It also looks at the big-money buying and selling in the broad market through its Big-Money Index (BMI).
And here’s what its data looks like right now…
Now, when the index level dips to 25% (the green line in the chart) or lower, sellers have taken the reins, leading the markets into oversold territory. And when it hits 80% (the red line) or more, it means buyers are in control and markets are overbought.
Currently, the BMI has surged to over 95%. So we’re in extremely overbought conditions and due for a pullback. This brings us to the question: When?
Well, that’s where the market’s “tell” comes in…
Take a look at the graph below. It shows the volume of big-money buying in exchange-traded funds (ETFs) since January 2018.
ETFs offer broad exposure to the market. So big-money buying and selling activity in ETFs is a strong proxy for the market’s movements.
Notice the two circles at the far right of the chart. The green circle highlights the record amounts of ETF buying last month. But the smaller, red one indicates the plunge in ETF buying at the beginning of this month.
That’s a huge drop-off.
And this data gives us a clear “tell” of what’s next for the market: Expect lower prices in the near term.
Playing Our Next Hand
Remember, don’t get caught up in the headlines. They’re like poker players trying to bluff you out of your money.
Instead, follow the data. It can tip the market’s hand in your favor. And right now, we know a pullback is coming.
So how do we play our hand? We’ll follow our win-win game plan – by sitting tight and buying once the short-term sell-off arrives.
Look, I love to grab great stocks on sale when everyone else is afraid to own them. That’s how you win at the stock market. But you have to be patient.
It’s how Mike McDermott beat Teddy KGB. And it’s how we’ll beat the market, too.
Patience and process!
Editor, Palm Beach Insider
P.S. Don’t forget… My system follows the big money’s lead in all market conditions – including during the upcoming pullback.
So it’ll continue to take the emotions out of investing – and identify huge winners that lead you to profits – no matter where stocks are headed next. It can help you target the best stocks out there, so you can add them to your shopping list.