Remember New Year’s Eve 2019?
Most of the people I celebrated with were ecstatic to leave the year behind us. For many, ’19 was not a great year. People were happy to give 2019 the proverbial finger, and get on with the new decade in 2020.
If only they knew then what we know now…
In 2020, most of us faced the first global pandemic of our lifetimes. Amidst it, we saw a bitterly contested presidential election. And through it all, stock moves were absolutely extreme – in both directions.
So in today’s issue, I want to look back on how the market fared in 2020… and how my focus on big money guided us through the chaos…
The Big Money’s Guiding Light
Let’s quickly recap the market action through the year…
We saw an incredibly bullish January and February. From the start of the year to the pre-cash peak, the S&P 500 rose almost 4%.
Then COVID-19 came along… and changed everything. Stocks cratered 33% as the pandemic altered the very fabric of our lives.
March, the peak of pandemic hysteria, was a period of what felt like insurmountable darkness. But looking back now with a cool, informed head, it’s clear we’re in a much better spot now than what most of us would have imagined.
If you know me, you know I’m an incessant optimist. In the depths of the March gloom, I was telling people to bet on America and look for great deals on stocks. I knew we would recover and push forward like we always have done.
On March 9, I even went as far as to call the day the market would bottom: March 20. And let me be the first to apologize… the market didn’t actually bottom until March 23, the following Monday.
Regardless, I’m even more positive now than before. With several effective vaccines on the horizon, it’s hard not to be.
Mark my words: we will come out of this stronger than ever… I believe that wholeheartedly.
How We Predicted 2020’s Biggest Moves
We’ll remember 2020 as a year of incredible volatility. But not only were we able to navigate it safely, we were able to crush the broad market using my Big Money Index (BMI).
(For context, my Palm Beach Trader portfolio – which uses the BMI – was up an average of 40% in 2020. By comparison, the benchmark S&P 500 was up 14%.)
For those unfamiliar, the BMI is a timely indicator of where huge professional investors are moving their money.
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 – to make sure it’s highly accurate, comprehensive, and effective.
It scans nearly 5,500 stocks every day, using algorithms to rank each one for strength. It also looks for the movements of big-money investors. And when it sees them piling into or getting out of a stock, it raises a yellow flag.
I put these yellow flags through another filter. If the flag turns red, it means the big money is selling. If it turns green, it means the big money is buying…
It’s that simple: When I see green, the big money is buying. But here’s the thing… When we plot the BMI over the stock market, it can be a powerful indicator…
Predicting Big Market Moves
The first thing you should look at is that yellow line. When it rises, big money is buying. When it falls, big money is selling.
When it falls below the green line, the market is oversold and we should expect a quick rebound. When it pierces above the red line, the market is overbought. But the difference there is overbought conditions can last a long time.
Notice how, at the end January, the BMI peaked. Stocks still rose for a few weeks… and then fell off a cliff starting in late February.
I warned you that would happen, and it turned out to be spot-on. Granted, I didn’t know a global pandemic would come and upend life as we know it. But big money sure knew something was about to change…
Buying became unsustainable and then there were no buyers left. Big money figured it out and dumped their stocks on the unsuspecting everyday investors who kept on buying right up to the market drop.
But, notice how big money was selling well before the big crash?
Now, fast-forward to early April. The mood was awful, to say the least. Stocks had just spent the last month falling, and it looked like there was no end in sight.
But, the BMI signaled the market was heavily oversold. I alerted everyone to buy stocks. I bet on America and encouraged you to grab stocks on sale with both fists.
It was an unpopular idea at the time… but the data convinced me I was right.
Once again, the BMI prefaced a monstrous rise in stock prices. And the S&P 500 is up over 65% from the March bottom, trading at new all-time highs.
Then it went overbought once again on May 6. I warned it could stay that way for a while. (Though, I had no idea it would break the previous 30-year record and stay overbought for four months.)
But once that index started to fall out of overbought, we saw the market follow suit and hit a patch of volatility.
It was around this time I started to notice a pattern in the BMI…
Looking back at the BMI for every election year since 1990, I noticed that big money consistently sells ahead of elections and buys after. It makes sense: if you manage billions of dollars, you like to bet on sure things. As we all know by now, elections are anything but certain.
Right on schedule, the market action played out how I thought it would. And the big money’s been buying ever since.
Now we are right back to overbought. Again… we can stay that way for a while. But my historical data says the BMI should peak on January 6.
When it starts to fall – whether then, before, or after – is an indication the near-term market peak is here. When that comes, I recommend taking some profits and raising cash to buy high-quality stocks when they go on sale.
Follow the Big Money
You have now seen 2020 through the lens of the BMI…
You can see how powerful it is, and that’s only one year! This index goes back 30 years and has proven to be extremely effective in isolating market tops and bottoms.
Remember this as we head into 2021: If you want to outperform the market like we did in 2020, you can’t let anything but the moves of the world’s biggest financial players guide your decision-making.
As for what I predict for 2021… stay tuned!
Happy New Year,
Editor, Palm Beach Insider