“This is your captain speaking. Take the time now and get up and move around the cabin. We’ll begin our initial descent shortly.”
I’m sure most of us have heard that while flying. It’s the signal that, soon, the flight path will change course.
And if my “unbeatable” stock-picking system could speak, the message would be similar.
As you know, the market has been in a buying frenzy for the past month. But the pullback my system has been anticipating is underway.
Since May 6, the market has been in extremely overbought territory. In fact, as of Wednesday’s close, it rocketed about 45% from its March lows.
Now, over the last 30 years, my data shows that overbought periods like this last an average of about a month. And like clockwork, the market started tanking yesterday.
Sure, it recovered a bit of those losses today. But this small rebound is merely like a pilot correcting course before touchdown; there’s definitely more downside ahead.
Today, I’ll tell you how to prepare for the bumpy landing…
A Decrease in Altitude
Last week, we saw extreme buying across the board…
For instance, we’ve seen record-breaking amounts of money pouring into exchange-traded funds (ETFs), which is a good proxy for the broad market.
But looking forward, my system says to expect a further decrease in altitude.
Remember, it scans nearly 5,500 stocks each day, using algorithms to rank each one for strength. It also looks at the big money’s buying and selling movements in the broad market as well.
And right now, the data says stocks are overheated…
Now, when the Big-Money Index (BMI) 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.
As you can see, the index level surged to almost 95%. So we’re still in extremely overbought conditions. But it’s finally starting to trend lower after that peak. And I expect it to continue falling in the days and weeks ahead.
This BMI decline signals a pullback ahead. You see, since 2005, the data signaled 19 other times that we’ve seen similar market conditions. And the average forward returns over the next three months following those periods are a less-than-exciting -4.6%.
This obviously isn’t a good time to be buying. So what do we do now?
Time to Buckle Up
This current bout of volatility shouldn’t come as a surprise to longtime readers. You see, we’ve been preparing for this sell-off for a while now…
Remember, my system is so accurate, it was only one trading day off in predicting the March 23 bottom. The BMI – our market timing indicator – called for the trough to be on March 20. Now, it’s pinpointing the top.
You see, there’s a lot of fear of missing out (FOMO) in the stock market. And as I said, that’s an awful time to be buying stocks.
We saw something similar in the crypto market back in 2018, as buyers raced in for fear of missing profits. Shortly after, a huge correction followed, offering better entry prices.
To be clear, today’s stock market is not a wild, speculative bubble. But as we’re seeing with yesterday’s sell-off, the cracks are emerging again.
Now, don’t let that freak you out. It’s actually a good thing. Markets need to cool off after such extreme buying periods. Plus, the best buying opportunities rarely happen when everyone is clamoring to buy.
So be prepared for a bumpy landing… and have some dry powder ready.
My system is already targeting some potentially mouth-watering deals coming along in the discretionary, technology, and healthcare sectors. We’re just waiting for my system’s green light to start shopping again.
Patience and process!
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Jason Bodner
Editor, Palm Beach Insider
P.S. As I mentioned above, my “unbeatable” stock-picking system has identified several potential outliers, we’ll wait for the right moment to strike. As you know, timing is everything.
It’s the same strategy we used to add double-digit winners like Veeva Systems and Old Dominion Freight Line to my Palm Beach Trader portfolio.
Now, both are currently above their buy-up-to prices. So I don’t recommend establishing a position now. But with a current 82% win rate – and an average win of nearly 79% – my portfolio still has plenty of winners to choose from.
Plus, my system is identifying the next crop of outliers. And you can learn more about how it works right here…