Institutional Money Flows Report

Headlines rarely offer value.

That was a case in point in 2023.

The better angle is to focus on evidence-rich data. Currently, history says to buy the dip in the first quarter.

Remember, last year, how prophetic pundits proclaimed that markets would crash? Or that higher interest rates would climb unabated forever?

Be careful what you absorb as truth. Rarely are crowd-attracting headlines worthwhile.

Instead, focus on money-flows and historical evidence. Those put you in the driver’s seat.

Here are a couple of examples. In early November, positioning suggested 2 bear killer signals were flashing. Prior to that, the evidence hinted at a healthy Summertime pullback ahead.

Both non-consensus calls helped us navigate a volatile 2023.

Today, in a similar vein, we’ll make the case of why you should buy the dip in the first quarter. Election years, like 2024, often bring volatility in the early months.

But don’t get spooked. Those are normal hunting grounds for outstanding stocks.

Let’s now take a walk through our data, measuring the current environment. Then we’ll see what potentially lies ahead in the coming weeks and months.

Markets Remain Extremely Overbought

Lately, indices have come under pressure. You can see this with the following graphic displaying major index performance year-to-date and over the past week:

Notably, the small-cap Russell 2000 is down 3.35% in 2 days, while the Tech-heavy NASDAQ COMP has dropped 2.79%.

Is it time to run for the hills? NO.

After gigantic double-digit performances for major indices during November – December, it’s only natural that stocks would take a healthy breather.

In fact, our data is signaling more rotational action rather than outright selling. You can see this clearly with the Big Money Index (BMI) still resting well into overbought territory:

Notice how recently the yellow line is hovering rather than falling. This is different action compared to the last 2 red zone instances. Only when the line begins to fall should we expect a true selloff to occur.

Make no mistake, we are due for a pullback. We’ll let the data guide us once it begins.

Even with a dozen charts signaling big gains for 2024, we’re still confident there will be buyable dips along the way.

Based on history, Q1 should present one.

Let’s look at the evidence.

Why You Should Buy the Dip in the First Quarter

Given the new year is here, it’s important to have some framework for expectations. I went back and reviewed how the S&P 500 tends to perform on a first quarter and annual basis going back to 1980.

Investors have been told to expect 10% gains for stocks over the long run. Turns out, that’s exactly what’s transpired the last 44 years.

Since 1980, the S&P 500 has jumped an average of 10.3% annually. When you break those returns down, we see that Q1 averages a 2.07% pop, while Q2 – Q4 results in nearly 8% gains:

That’s a lot of green. But let’s dive deeper. There’s something unique about 2024 – it’s an election year.

Believe it or not, election years tend to be wildly volatile. We studied a trading setup in 2020, which detailed how equities dump into the vote then bump after it.

That’s exactly what transpired.

It should come as no surprise that there’s mudslinging from the podium and in markets.

However, what’s beautiful is the tendency for stocks to sputter in the first 3 months of the year before ripping in Q2.

Using the same framework as above, let’s zero in on election years going back to 1980. We’ve had 11 instances.

While it’s true that the S&P 500 tends to show lackluster average annual returns, most of the pain occurs in the months of January – March.

Q1 of election years see stocks fall an average 1.49%, wildly different than the expected 2.07% gain in all years back to 1980.

As usual that’s only part of the story. April kicks off the green period with a strong 8.06% return from Q2 – Q4:

This is why you’ll want to buy the dip in the first quarter. While election years tend to underperform, it’s historically due to a rocky start to the year.

Additionally, you should understand that election years have a few extraordinary events heavily skewing the results with a red tint: 2000’s Tech Bubble, 2008’s Global Financial Crisis, and 2020’s COVID-19 Pandemic.

Clearly those one-off scenarios need to be accounted for, but 2024’s outlook is one of earnings growth and an expected soft landing.

So use the potential coming weakness as a grand opportunity to scoop up high-quality stocks on sale. Let the Big Money Index (BMI) guide the way.

Let’s wrap up.

Here’s the bottom line: The latest pullback in stocks is healthy and to be expected after an incredible year-end rally.

On the surface, major indices have sputtered, but our BMI indicates rotational action rather than outright selling.

Eventually, however, our BMI will begin to fall from overbought levels, likely sometime in Q1. Election years have a strong tendency to weigh on equities early in the year before jolting in Q2.

Don’t follow the mainstream media for clues. Last year was a masterclass of their value…zilch.

History says you should buy the dip in the first quarter, letting money flows dictate the opportune time to pounce.