The Biggest “Bear Killer” Signal Since October 2023 By Lucas Downey, Contributing Editor, TradeSmith Daily You can feel the tension in the air… Investors are worried, and I can’t blame them. The latest tariffs – 25% on imported parts and vehicles – are set to take shape on April 3. Without question, this puts all kinds of pressure on equities. One look at the major index returns from Feb. 19 through midday March 31 shows the reality. The Nasdaq is easily in correction territory, down 14%. The S&P 500 is near correction territory, with a recent peak-to-trough performance of -9%: 
From this vantage point, the easy thing to do is focus on how ugly things are... and how worse they may get. But I view that as a big mistake. Sure, no one can predict the future. The path of tariff policy is anyone’s guess at this point. But what if I told you stocks are getting to a washout point where the odds are extremely in the favor of brave buyers? This is where we find ourselves today. Two weeks ago I shared stats on how oversold small-cap stocks are. Today we’ll do another dive looking at a rare breadth indicator that’s plunged to levels last visited in October of 2023. And dedicated readers know how hard we were pounding the table to buy stocks back then… Historically, this signal has been a powerful setup for large caps and the Nasdaq. Not only will we cover that signal study… We’ll also highlight a single name that should be on your radar once the tide turns. | Recommended Link | | | | Inside these walls, Elon Musk is working on what has been called “the most powerful weapon man has ever created.” But it’s not missiles, drones, or any traditional weapon. Click here to see the details because it could secure America’s supremacy in the 21st century… and make a few people wealthy. |  | | Stocks Show Worst Breadth in Over a Year My colleague Jason Bodner and I spent years on Wall Street handling very large institutional stock orders. As just one example, whenever large pension funds rebalance portfolios, they move hundreds of millions, if not billions of dollars. Facilitating orders like that, along with those of hedge funds and other large investors, is how I earned my stripes. That experience helped us learn to interpret unusually large trading flows. In basic terms, when a stock is heading higher as volumes are increasing, that’s a strong sign of institutional support. On the flip side, when a stock is falling on unusually high volumes, that’s an outflow signal. When you run that process on thousands of stocks daily, you get a clear picture of supply and demand for equities. Lately, as you can imagine, supply has been heavy as stocks are falling day after day. At TradeSmith, we look at all kinds of data and signals. One thing that jumped off the chart at me this morning is the extremely weak breadth in the market, as measured by the 5-week moving average of inflows. This chart plots the daily count of inflows (green) and outflows (red). I highlighted the recent weak breadth reading and the last time we saw similarly large outflows. 
More recently, the total 5-week inflow was 1,141 vs. 3,518 outflows. That puts the inflow ratio at 24.5% (1,141/4,659). A ratio like that says one thing: pure capitulation. How do I know? The last time we saw a dip below 25% on this ratio was in October 2023. For those keeping score, we were loud and clear about buying stocks back then as we posted a "bear killer" signal… While this study is different, it has a similar bullish tone. Going back to 2012, this 25%-or-less ratio has occurred 307 times. These rare meltdowns include Q4 of 2023, inflationary 2022, COVID-19, late 2018, and more. Those were each very rough times, with little forward clarity… similar to what we’re seeing today. But if you step back and assess this from a data perspective, you’ll get a breath of fresh air… Hold onto your hat, because here are the forward returns after this signal: - Three months later, the S&P 500 gains 7.3%, and the Nasdaq gains 9.3%
- Six months later, the S&P 500 chalks up 11% gains, and the Nasdaq lifts 13.5%
- 12 months later is what’s most interesting. The S&P 500 rips 22%, and the Nasdaq soars 30.3%
And to this last point, only one instance saw the S&P 500 and Nasdaq lower a year later... making it a positive hit ratio of 99.7%: 
There’s nothing else to call this but an extreme moment of capitulation. It’s not the end of the bull market. This storm will pass… like all others did in the past. Of course, we still have to navigate these stormy seas so we can make it through to calmer waters. How do we do that? Focus on quality. Last week, I highlighted an energy stock that’s kicking the pants off the market. If you love relative strength during times of market stress, it’s a good reminder of some opportunities out there. But if you’re looking for something oversold with a high-octane flavor, I’ve got something extra for you today… This Oversold AI Company Is Ripe for Big Gains One AI stalwart I’ve discussed in the past, Broadcom (AVGO), is getting swept up in this market washout. (If you’d like to read more about the company, check out this post.) Below you can see the company has fallen 33% from its December highs. 
Now, I’m not suggesting the lows are in. However, when we look at the study from earlier and plug in Broadcom’s forward performance, history says these oversold periods are ripe for big gains. Currently AVGO is the fifth-largest holding in the Nasdaq, with a 3.65% weighting. Given the Nasdaq surged during weak breadth periods, let’s have a peek at AVGO under the same lens. I’ve included the Nasdaq performance alongside AVGO for comparison. Incredibly, AVGO saw huge, outsized returns with: - Three-month average gains of 20.2%
- Six-month average gains of 32.3%
- 12-month average gains of just over 68%
Keep in mind, a lot of this blistering performance comes post the 2020 and 2023 bear markets. You should never expect these levels of gains in a normal market. But… We’re not exactly in a normal market now, either. The most important thing to understand is this… There will be green shoots in the market once the tide flows back in. There always are. While we sit through the tariff tug-of-war, it’s not a bad idea to have a “barbell” strategy, where you have some outperforming, safer dividend stocks like health care and staples. But also do some homework on oversold companies too. Once confidence comes back into the market, prior winning names will be first out the gate. This market storm is rough, I know. It’s been over a year since we’ve sat through this level of weakness. But hang in there. TradeSmith’s software is here to help you navigate with amazing data and insights. That’s a breadth of fresh air if you ask me. Regards, 
Lucas Downey
Contributing Editor, TradeSmith Daily P.S. As you saw in Saturday’s video I recorded with Michael Salvatore, Jeff Clark, and Andy Swan, TradeSmith is expanding its team to deliver our best ideas straight to you. We hope you liked our podcast-style roundtable video. And this is just the start of what we have planned for subscribers… If you’d like to learn more about everything we’re going to publish and develop at TradeSmith, you should hear from our CEO, Keith Kaplan, about our special 20th anniversary offer. But please note that this limited-time offer ends today. So this could be your last chance to get access to the newest trades and insights from myself, Jeff, and Andy and Landon Swan. To become a TradeSmith Platinum member before it’s too late, click here for full details. | 
No comments:
Post a Comment