Newton’s Third Law of Motion states that: For every action, there is an equal and opposite reaction.
Just think about throwing a ball in the air. It’ll rise until gravity takes hold and it falls back to Earth.
The market works similarly. A wave of buying eventually begets a wave of selling.
The question for us as investors is timing: When should we get out of the way before the market comes crashing down?
That’s what I’ll tell you in today’s essay…
Law of Motion in Action
My “unbeatable” stock-picking system helps us visualize Newton’s Third Law of Motion in the stock market.
Longtime readers know it scans nearly 5,500 stocks each day. It uses algorithms to rank each one for strength.
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.
As you can see, the BMI acts as a leading indicator.
When it peaked in mid-January, the market crashed shortly after, as my system predicted. (It’s like a ball falling back to the ground.)
Then, as my system predicted in March, the market rallied off its lows. (Like a ball bouncing hard off the ground.)
As you can see in the red circle on the chart, the BMI peaked again on June 22… and it’s now trending down. That means sellers are starting to take control again.
We’ll soon see the ball come crashing down again. So we’re likely headed for more downside from here.
Big money moves markets. That makes sense: The biggest players will have the most influence. They also tend to be smart and opportunistic.
The system shows sellers have finally started to overcome the nonstop buying. And we know big money likes to sell when everyone is buying.
I prefer buying stocks when no one wants them. That’s how you make money. Otherwise, you’ll be left holding the bag.
Remember, the BMI signaled the market was deeply oversold in March. And I told you it was a great time to buy stocks. Since then, the market has rallied about 36%.
Now, we’re topping out as sellers show up again. History suggests lower prices are just over the ridge.
So put together a shopping list… take profits on your big winners… and be ready to buy high-quality positions on the next pullback.
Patience and process!
Editor, Palm Beach Insider
P.S. My “unbeatable” stock-picking system has identified several potential winners that it’s ready to strike on when the timing is right.
We’ve used the same strategy 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 83% win rate – and an average win of 70% – my portfolio still has plenty of winners to choose from.