By: Costas Bocelli — November 11, 2018
I'll cut straight to the chase…
You've just been handed a massive opportunity.
If that sounds like music to your ears, read on.
In last week’s article, we mentioned that the October stock market correction created an excessively oversold condition.
So much so, that many internal breadth indicators that we track were registering their lowest readings in nearly a decade. When market breadth reaches such extreme lows, it usually presents a great buying opportunity over the following six months.
We also mentioned last week that once the cloud of uncertainty was lifted following the midterm elections, that new clarity could spark the next bull market rally.
Well, the results are in! And if history is any guide, the outcome is resoundingly bullish for U.S. Equities.
As expected, the Democrats picked up enough seats to win back control of the House of Representatives. And the Republicans not only managed to maintain control of the Senate, but were able to pick up a few additional seats and expand their slim majority.
Here why this is good news…
According to a research note from Bank of America Merrill Lynch, when there is a Republican in the White House, and a split Congress (like now) the average annual total return for the S&P 500 is 12%.
But this year has been anything but ordinary. In fact, it’s been down right tricky for most investors. Heading into the Midterm Elections, the S&P 500 has gained roughly 3% year-to-date.
The stock market has endured two corrections in 2018, including some of the strongest momentum stocks -- including the so-called FAANG’s (Facebook, Amazon.Com, Apple, Netflix and Google) -- seeing significant drawdowns.
So with just two months remaining until the end of the year, the S&P 500 is lagging the historical average gains by about 9%.
We’re also entering what’s considered to be the “seasonally strong” half of the year for stocks -- November 1st through April 30th.
Whether a huge rally materializes or not, the market landscape is primed to potentially be one of the biggest catch-up trades in history.
Fund managers and large financial institutions are keenly aware of this and will be increasingly pressured to outperform the market benchmarks heading into the final weeks of the year.
Money managers are graded and compensated based on their performance versus a market benchmark, such as the S&P 500 index.
Now that the midterm results are in, these large financial institutions are making massive bets on the segments of the market they think will generate superior returns versus the broader market.
Needless to say, they're keen to keep this information to themselves.
Here’s a bullish percent index chart on a certain group of stocks.
(Click an image to enlarge)
If you’re not familiar with a bullish percent chart, no worries.
But what I want to call your attention to is that when the current column is in X’s and rising (the one to the right highlighted in green), it tells us that more and more stocks within the group are seeing their prices rising and breaking above key levels of resistance on their respective trend charts.
In other words, their stocks are being accumulated which is a very bullish development.
Now have a look at this graphic…
This is a snapshot of our Sector Relative Strength Matrix.
At True Market Insiders, we break-up the U.S. Equities asset class into 41 narrow industry groups which gives us a more granular picture of the moving parts that comprise the U.S. economy.
The Sector Relative Strength Matrix basically pits each of the 41 segments against each other on a daily basis. This gigantic "battle" of price continuously ranks sector performance based on a measure of relative strength "buy signals".
Essentially, the industry groups that are domiciled at the top of the list are the ones demonstrating positive relative performance versus the ones at the bottom of the list.
The groups that rank highly in relative strength are typically the ones offering the best chance of outperforming the market.
And this is true regardless of what the "external market" -- the DOW, the S&P, the Nasdaq, etc. -- is doing.
In other words, to see the "true" market. you have to look at the "internals".
See you soon,