When you aced a test in school, you ran home to proudly show your parents that coveted score of 100.
The perfect score.
We’re used to the highest scoring being the best, but there’s a caveat when it comes to investing and quantitative analysis.
A perfect score would be a red flag.
Why? Because that score can’t get any better. It can only get worse.
And that means a stock’s price is also almost certain to go down, at least in the short term.
That’s why I almost always avoid buying stocks with a Quantum Score over 90. The data tells me those stocks will probably pull back at least somewhat in the near future.
A Technical Score over 90 is my Quantum Edge system’s signal of “overbought.”
When that occurs, the Fundamental Score is key in determining next steps. If a stock with strong fundamentals is overbought, a pullback is usually a good buying opportunity after some of the froth comes out. But if the fundamentals are average or worse, it may be an overheated stock to avoid altogether.
I bring this up because I see an unusually high number of Technical Scores above 90 right now. All that Big Money flowing into stocks after the election lifted some stocks into unsustainable territory.
Money especially gushed into financial stocks. They were the best performing stocks the day after the election, with the broad-based Financial Select Sector SPDR Fund (XLF) surging 6% to all-time highs. My system also ranks the 11 major sectors, and Financials are by far the strongest since Election Day.
Big Money anticipates deregulation in a second Trump administration, opening the door to more mergers and acquisitions that will benefit banks. There’s also talk of lower capital requirements and an easier path to raising consumer fees. And at the core, financials just benefit from a stronger stock market and economy.
This is familiar territory, as financials outperformed the first time Trump was elected in 2016. In the year after that election, the XLF surged 33.5%, thumping the S&P 500’s 23.5% return over that same year.
Financials stocks are clearly one area to invest in, but it’s also clear that some have gotten overheated. Two in particular stand out with blistering Technical Scores of 94.1 alongside okay-but-not-great fundamentals.
M&T Bank (MTB) has an overall Quantum Score of 81, which is actually in the preferred buy zone between 70 and 85. Shares jumped 12% the day after the election, and a deeper dive into the fundamentals and technicals reveals an overbought stock that has likely gotten ahead of itself.
That 94.1 Technical Score is the tops in my system right now, shared with several other stocks that look top heavy. That Technical Score in and of itself would give me pause about putting money into MTB, but that Fundamental Score closer to 60 lowers the probability of future upside more than I would want to see with those overheated technicals.
I’m not saying MTB is a bad company or even a bad stock, but the data doesn’t align optimally to make it one of the best opportunities in the market right now.
The same is true with Interactive Brokers (IBKR), which is a global trading platform and not a bank. It’s a popular brokerage also with a Quantum Score of 81, but further analysis of data shows it may be too hot to handle at the moment.
IBKR similarly surged 11% the day after the election, and I do see more Big Money buy signals with it than MTB. Still, that sizzling Technical Score tells me some sort of pullback is likely in the near term.
To be clear, this is not all financial stocks. There are also financials out there with more balanced scores that forecast a higher probability of higher prices.
In fact, I just recommended one to my TradeSmith Investment Report readers. It’s a fantastic company with what might be the best business model on the planet – it’s more of a financial technology company than a bank. Its Quantum Score, and both the fundamentals and technicals are in the 70s.
And one of our big winners in Quantum Edge Pro is a similar story. It’s a smaller company, which is what we focus on in that service, and it has produced big profits of nearly 70% for us.
Tradeweb Markets (TW) is an electronic trading platform, making it also as much an investment in technology as it is financial services. TW’s Quantum Score of 79.3 is right in the sweet spot, and the technical and fundamentals both score in the upper 70s.
That’s the “just right” power we want to see – strong but not muscle-bound. Those readings are most predictive of higher future prices. TW has shot above where I recommended my readers buy it, and we’re not chasing it at the moment.
But I share it with you as an example of a great stock with the necessary Power Factors to keep it driving higher – a growing and profitable business (fundamentals), strong trading action (technicals), and Big Money inflows.
From a quant perspective, those are the best opportunities in the market. I’ve also found that to be true in the real world of investing.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends