Is a Pullback Imminent?
We wrapped up first-quarter trading today (the market is closed tomorrow), and there was a lot of money made these last three months.
The S&P 500 gained 10% – a whole year of average returns in three months.
I’m happy to say it was also a great first quarter for my personal investments.
And most importantly, it was a great first quarter for my readers. For example, our Quantum Edge Pro portfolio shot up a little over 15% in total and beat the S&P 500 by 1.5X!
Those are spectacular gains any time, but we appreciate them even more knowing that the data at one point was partially indicating that a pullback could be in the cards.
In fact, I received a question about that from TradeSmith reader, Henry:
I have been following your work on how Big Money moves the market. In it you’ve mentioned that the market is overbought since December 14, 2023, and we should prepare for a pullback when it goes back under 80. Since then, I have been sitting on the sidelines waiting for that pullback that has not materialized, and as a result left a lot of money on the table. Am I correct in thinking that this pullback is imminent, or should I get back in the market?
First, I need to be clear that I am not allowed to provide personal financial advice. Only you and your financial advisor know your specific situation and can best decide next steps.
I can share my analysis and data that informs my strategy, though, so let’s jump into that.
I did indeed mention that the market was overbought back on Dec. 14 (left circle below), when my proprietary Big Money Index (BMI) rose above 80. That meant 80% of the Big Money signals in my system were buys, which is historically unsustainable and, therefore, considered overbought.
Source: MAPsignals.com
I also mentioned that the more important signal is not when stocks become overbought but when they fall from overbought. That happened on Feb. 5 (the right circle above), and knowing that historically signals a pullback, I advised my Quantum Edge Pro readers to lock in partial profits in some big winners that were up from 45% to 200%.
Along the way, I have also told my subscribers that the BMI falling out of overbought is one signal – and a very good one – but we also needed to see increased selling. We haven’t seen that. Instead, the BMI has fallen because buying has lessened from historically high – and unsustainable – levels.
Source: MAPsignals.com
I’ve circled where we saw a ton of buying (the big green bars) in December. That exceptionally big spike on Dec. 14 – which happens to be the date the BMI went overbought – is one of the biggest buy days my system has ever recorded.
As time went on, those massive buying days slowly rolled off the BMI’s calculation. We continued to see more buying than selling, just substantially less buying than December’s extreme levels. And because buying outweighed selling, the market continued rising.
Heading into the second quarter, we have a continuing bull market without major red flags of a correction. Selling simply hasn’t picked up enough to indicate it. At this point, the Big Money Index has leveled off into a tight range between 71 and 74 for the last six weeks or so.
In other words, more than seven out of 10 Big Money signals are still buys, which is very healthy.
Now Is the Time To Be in Stocks – The Right Stocks
My own opinion is that investors need to be in stocks right now – the right stocks, of course.
What I’m doing in my personal accounts and my research services is looking for great stocks with superior fundamentals, strong technical strength, and signs of institutional support – or Big Money buying.
Research shows that the stocks with those characteristics – the highest quality stocks in the market – account for most of the historical gains.
It blows my mind that only 4% of stocks account for all of the net gains over Treasury bonds… for the last 98 years! This is proven by Professor Hendrik Bessembinder. We all know stocks outperform bonds historically, but Bessembinder’s work shows that you must be in a handful of ultra powerful stocks to beat bonds.
I designed my Quantum Edge system to find these exact stocks – stocks that give you the highest probability of beating the market over time.
The formula is simple to understand: More winners than losers – historically, I count on winning about 70% of the time – with the winners bigger than the losers.
It’s not as easy to do as it is to understand, as evidenced by 96% of stocks failing to beat government bonds. And that’s over the last 100 years! That’s why I built the system to analyze roughly 6,000 stocks every day and focus on the data most predictive of higher prices.
We could still have a pullback. It would surprise me after the rally these last five months, and as we move into some of the historically weaker months of the year. I will continue watching my Big Money Index for signs that selling is on the rise.
When that happens, I might make some minor adjustments or do some rebalancing, but I won’t cash out. I use powerful indicators to help with timing, but I am not a market timer. I have been 100% invested in stocks since 2014… and even earlier than that. That means that I have ridden through some of the deepest corrections in history, including the pandemic.
The same process and system that helps me identify the best stocks is also my strongest defense against substantial losses. That doesn’t mean I sidestep volatility, but it does mean that when the rubber band invariably snaps back, I am in the best stocks to own that typically rebound the fastest and go on to new highs.
The best way to beat the market consistently is to use the methodology I coded into my Quantum Edge system: identify the rare breed of high-quality stocks that big institutions are pouring money into, invest in them, and stay with them until the story changes.
I’m happy to help. I sincerely thank you for your question, Henry, and I wish you and all of us much success in the coming quarter and beyond.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
P.S. The markets are closed tomorrow in observance of Good Friday. Our TradeSmith offices are also closed tomorrow.