Game Plan for an Oversold Stock Market – January 27, 2022
Stocks are getting sold with abandon. This is exactly the time to focus.
Here’s my game plan for an oversold stock market.
Stocks are getting sold with abandon. This is exactly the time to focus.
Here’s my game plan for an oversold stock market.
Let’s cut to the chase: markets and investors are fragile right now. Stocks have been absolutely pummeled…my portfolios included.
Last week, I told you how massive the stock selloff has been. And this week is no different. Stepping away from the headlines for a moment will give you needed perspective.
I see parallels in our data that remind me of the pandemic. Back on March 4th of 2020, we saw the same level of selling. And we built a framework that predicted a market low on March 20th, 2020.
It was one of our best calls ever. So, be cheery!
Today I’m going to use a similar framework to predict the date of the market bottom. It also lines up with my game plan for an oversold market.
But as always, let’s check in on the data first!
Most Selling In Stocks Since the Pandemic Low
The Big Money Index has been rangebound for a year. I’m predicting it’s about to fall hard.
That’s because we’re seeing the most selling in stocks and ETFs since the pandemic lows.
What’s going on under the surface is sheer destruction. Since the BMI follows the 25-day moving average of buys and sells, it’s going to take a few more days before it falls hard.
Below you can see the level of red.
When we see off the charts selling in stocks, it’s time to get a game plan for an oversold stock market.
Take a look at what’s happening with ETFs too. It’s been risk-off for a couple of weeks now. Yesterday rang up the most ETF sells since March 2020.
This is exactly the same type of selling we saw during the pandemic. We are 2 weeks into a major de-risking event.
So, should we throw in the towel? Should we pack up and quit? NO!
This is the time to think clearly. The framework we used to nail the pandemic lows is what I’m going to use for this selloff.
If you’re looking for my game plan for an oversold stock market, follow along.
Game Plan for an Oversold Stock Market
Data has a way of cutting through the noise. It’s emotionless.
To know where markets are headed, we need to look backwards. History often rhymes.
Last week’s selloff looked eerily similar to prior stock dumps. We had a week where 93% of stocks were sold. That’s significant. Since we’ve been in business (July 2014), we’ve seen 24 weeks with similar pain.
Keep in mind, the pandemic plummet and late 2018 had the same look and feel as it relates to data.
Below I’ve plotted those 24 weeks of monster selling. And you can see a few things:
- Most nasty weeks saw an average of 93% of stocks sold
- The average S&P 500 pullback on those weeks was -3.57%
- The average trading days to a market trough was about 14
So, that puts an average trough date hitting on February 11th, 2022. And to add another feather in the bull’s hat, that’s around when the BMI will hit oversold if selling keeps up like this.
But, we must keep going! I want a positive message to exude in times of market pressure.
Guess what the average return for markets are after weeks like this? If you think it’s bad…you’re wrong. Below are forward returns for stocks after a monster selloff:
Ladies and gentlemen, that’s a lot of green. These are fertile grounds for buying stocks. But now I’m going to drive home why you need to stay invested during periods like now.
Here’s the deal. Eventually markets will trough out. And if you miss the low, you will miss out on a face-ripper of a rally. Look at the forward returns for stocks once the market lows trigger after a washout.
Put the bear suits away!
Off the right is all that you need to know. Once the market hits rock bottom, if you’re not strapped in, you’re going to miss the rocket launch.
Now you have my game plan for an oversold market.
Let’s wrap up.
Here’s the bottom line: The selloff is brutal. If it keeps up, I’m looking for a market low hitting by mid-February. The framework we used during the pandemic was spot on. Today’s framework gives me a game plan for an oversold market.
They say proper planning prevents poor performance. I say planning for an oversold Big Money Index has guided me in the past…and it’ll guide me in the future.
You guys hang in there. Don’t give up.
Opportunity comes when hell is hottest.
Author: Lucas Downey