The selling isn't done…

Get Your "Buy the Dip" List Ready By Lucas Downey, Contributing Editor, TradeSmith Daily When it comes to stocks, it's not where we are that matters… it's where we're going. In other words, we should focus less on today and more on tomorrow. Here's why I tell you this… After a monstrous rally, markets are finally stalling. Year-to-date, the S&P 500 has gone nowhere with a negative 0.03% return. We have to wonder: is this latest tug-of-war in stocks the beginning of a pullback? Based on my favorite indicator… I believe it is. And if I'm correct, history says we should expect market weakness in the weeks and months ahead. While this might sound unsettling, it actually falls right in line with the election-year investing playbook we published earlier this month. (Catch up on all three parts here: what price action to expect, what size of stocks to buy, and the best sectors in that size class.) The basic game plan is simple: Expect weakness in the first quarter before a lift into year-end. That means now is the perfect time to set up your "buy the dip" list. And today, we'll study the one indicator that can help us determine the best time to buy the dip I see coming. You'll want to read today's TradeSmith Daily closely. It's a bona fide investment blueprint for the next two months… RECOMMENDED LINK CRITICAL January 31st Warning Jason Bodner is going public today with an urgent new warning. He believes the most popular investment of 2023 is set to pop... And it could all start just days from now. This has NOTHING to do with A.I. stocks... It has NOTHING to do with crypto currency... And it has NOTHING to do with high-flying tech stocks. Instead, this corner of the market you likely have cash parked in has swelled to nearly $6 trillion. Click here to watch this warning now An Equal and Opposite Market Reaction Think back to science class from high school. There I'm sure you learned about Newton's third law, which states: for every action in nature, there is an equal and opposite reaction. This applies just as well to physics as it does markets. Traders buy and sell stocks every day. Sometimes those actions get extreme… setting up for a big move in the opposite direction. Whenever this happens, and the crowd is leaning heavily to one side, you must prepare for an eventual snapback. A great recent example of this came in early November, with our essay showcasing a rare "Bear Killer" signal which showed a 100% chance of a stock surge. Back then, I introduced you to the Big Money Index (BMI) — our proprietary indicator that tracks institutional buying and selling in stocks. When buyers are in control, the BMI lifts. When sellers take the helm, stocks fall. Also important are the BMI's overbought level (over 80%) and oversold level (under 25%). In November, the BMI signaled one of the lowest readings ever — well under 20%, indicating extreme bearish positioning. We called for stocks to vault higher, and that turned out correct. Since that post, the S&P 500 is up 10%. Newtonian evidence is powerful! But today's environment shows the opposite of what we saw then… Below, you'll notice the yellow BMI line is sky-high, with the latest reading at 90% (circled at far right): This area is important to watch. Because once the BMI starts to fall out of overbought (below the dashed red line at 80%), stocks come under pressure. The three leftmost white circles are a case in point. Once the line dips below the red line, it indicates sellers are in control and buyers are nowhere to be found. Markets don't stay overbought forever… and these extremes offer powerful pivot points. But don't take my word for it — let me prove it. RECOMMENDED LINK Election Shock on August 19th? In less than 258 days, I expect the biggest presidential election shock since 1968. Forget about Donald Trump... And forget about Joe Biden... Instead, I believe the unexpected is barreling toward America. And I believe the aftermath will transform this country forever. Click here now to see the evidence I've gathered This Is No Ordinary First Quarter The table below shows every time the BMI was overbought since 2009, with the forward performance of the S&P 500 from the last day the BMI was overbought. You'll notice a few things: The third column shows that, once the BMI reaches overbought, it tends to hang there for an average of 24 trading days… or a little over a month. Currently, we've been overbought for 21 trading days — roughly in line with history. On average, the market is negative one week, two weeks, one month, and two months later. See the second-to-last row in the table. Not only are the returns gloomy, but the winning percent is heavily in favor of the bears. A week after we fall below the red line, stocks are positive only 37.9% of the time. Even two months out, the likelihood of positive returns is hardly a guarantee… with it happening just 55.2% of the time. You can see this in the final row of the table. Now let's take this study a step further and drive home why this signal is prescient. The chart below shows how the S&P 500 performs over those same time frames on any given period versus how it performs after an overbought BMI. In other words, the yellow bars below show the 1-week, 2-week, 1-month, and 2-month average returns for the S&P 500, no matter when you held it, for nearly 15 years. The black bars show those same returns after the BMI crosses down from overbought levels. This is eye-popping. A falling BMI acts like an albatross around the market's neck: This forecast further lends credence to our election-year study. A first-quarter dip should arrive sooner than the crowd expects. But if you're expecting me to come out and say you should run for the hills, think again…Like I said up top, the idea of falling stocks means we should be prepping our buy lists for when the BMI goes oversold again. And we should keep something else in mind… It's true that most stocks will fall when the tide's coming out, like we saw in September and October last year. That said, there will be leading groups that handle the volatility a bit better. Typically, defensive areas can offer ballast. As we showed you during our election-year series, the companies with the best edge this year should be small-cap financial and health care stocks. That's where you want to focus your attention. I recently called out a health care stock I love… and editor Michael Salvatore used the TradeSmith Screener to find two small-cap names for your watchlist. Also, don't discount earnings season. Standout companies that deliver great earnings beats could catch a strong bid even if the broad stock market keeps sliding. Remember: it's not the setup today that matters…it's what you do with it when opportunity slaps you in the face. The time to buy is not here yet, but it's coming. We'll keep you updated on the BMI and the best opportunities right here in TradeSmith Daily, so be sure not to miss a single issue. Regards, Lucas Downey Contributing Editor, TradeSmith Daily P.S. Last year, a single narrative dominated both the headlines and the returns… artificial intelligence. And if you thought that was the peak of A.I. mania, consider this piece of alarming evidence. Eric Fry, expert analyst at our corporate partner InvestorPlace, recently found something extraordinary tucked away within a little-known government document. This document shows that the winners of a fast-approaching "A.I. War" have already been decided… and investors who get exposure to them ASAP could be set for a second, even more powerful bullish wave in A.I. stocks. Go here for the full details, including how you can secure free access to two A.I. stock recommendations — one to buy, and one to avoid. Get Instant Access Click to read these free reports and automatically sign up for research throughout the week. 25 Doomed Blue Chip Stocks 3 Stocks to Build Your Wealth in 2024 5 Unapologetically Profitable Stocks for 2024 Customer Support: 866.385.2076 |  support@tradesmith.com Request Customer Service ©TradeSmith, LLC. All Rights Reserved. You may not reproduce, modify, copy, sell, publish, distribute, display or otherwise use any portion of the content without the prior written consent of TradeSmith. TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. 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