By: Chris Rowe — May 9, 2018
My Favorite Market Indicator is Begging You to Buy
As I talk to investors who approach me at social gatherings, investor conferences or even a few who recognized me on the street, people seem to feel like the market is on the verge of rolling over.
I respectfully disagree.
In fact, following recent pullbacks, the market is setting up to hand you a terrific buying opportunity.
Take a look at the image below.
That's the sector bell curve, and it's my single favorite indicator. It is the most accurate picture of the entire U.S. stock market that I know of.
In other words, if you could see the stock market "from space", it would look like a sector bell curve.
The Sector Bell Curve shows where 41 market sectors (and five international groups) fall on their "Bullish Percent Indexes (BPIs)". Those BPIs in turn represent each sectors' risk barometers.
Simply stated, a sector's BPI shows what percentage of stocks in a particular sector are on "Buy" signals. The reading moves between 0% and 100% (almost never hitting either extreme).
An overbought market will show the majority of boxes clustered toward the right and far-right of the curve. An oversold market will show the opposite -- lots of rectangles stacked together toward the left and far-left of the curve.
As you can see in the bell curve above, 34 of all sectors are below 50. Now here's why I'm excited right now...
PUTTING THE 'GOLD' IN 'GOLDILOCKS'
Here's that bell curve again (for easy reference). If this market were a painting it'd be the Mona Lisa. And that's as of right this second...
Things can always change but as of now, we're looking pretty good.
You do want to "buy low", right?
Well, when you're buying low, you're naturally going to have to swim in choppy waters so hold on tight...
Maybe things stay nice and smooth but maybe they get crazy...
I still think we're buying low.
As you can see, 73 of sectors (34 out of 46) show supply in control. And notice that the bulk of those sectors are stacked near the 40% line.
This is about as “middle of the road” as I can remember ever seeing the sector situation.
And when I say that, I don’t mean we are in some mundane boring market.
What I’m saying is it’s an exceptionally exciting market because right now sectors aren’t ferociously in decline… they aren’t showing signs that they want to tank (in aggregate).
What this looks like is a market that has weakened just enough to be a great (i.e. low risk) buying opportunity... but not enough to be alarmed or bearish.
The question, as always, is whether prices will bounce off of an intermediate-term low within a strong bull market or if prices will weaken further, causing much stronger downside.
In every notable price decline within every bull market, investors inevitably ask: "Did we just see the bull market top, or is it a good time to buy the dip?"
The vast majority of the time, it's best to buy the dip. The long-term trend, which is the strongest trend, is most likely to resume. It's that simple. There's no reason to become paralyzed with indecision.
Now, of course the best times to buy are when people are telling you you’re crazy. (That is, when they're being told by CNN that the market has "tanked". ) So make no mistake, really juicy buying opportunities do in fact happen when you can expect a few very scary jolts ahead.
But again, this is about as "gentle" a pull back as your likely to see. This isn't a scary picture at all. This pullback allows you to eat your cake and have it too. That is, you get to buy in the dip and not freak out worrying that the market is about to slam you lower.
And we have every reason to act as though we expect the bull market to continue marching toward its next high.
For one thing, the economy continues to strengthen.
For another, U.S. Equities are still the strongest asset class. For the record, the asset class rankings right now are:
- U.S. Equities
- International Equities
- Fixed Income
On top of that, 2018 is a mid-term elation year. And while the mid-term year is typically the weakest of the four years in the election cycle, the market tends to gun much higher the following year.
According to Jeffrey Hirsch of Stock Trader's Almanac, "After the midterm congressional election and the invariable seat loss by the president’s party... the president during the next two years jiggles fiscal policies to get federal spending, disposable income and social security benefits up and the economy firing on all pistons."
"Since 1914 the Dow has gained 47.4% on average from its midterm election year low to its subsequent high in the following pre-election year.”
And here's another strong sign you should feel confident buying the dip right now.
U.S Small Cap stocks are outperforming Large Caps. Last month the Russell 2000 Index (a proxy for Small Caps) rose 2.9% in April. The Russell 1000 Index (which tracks Large Caps) rose just 2%.
As a rule, Small Caps are a less-certain investment than their Large Cap cousins.
This tells us there's an appetite for risk in the market right now.
The bottom line is: you can feel confident buying into this "Mona Lisa" market.
That's it for me for now...
See you soon,