Forced Buying
Just 3 weeks ago, the pundits had you believe stocks were damned.
Today the crowd is stunned. We’re witnessing 7 consecutive days of green.
Extreme capitulation often triggers forced buying.
Headline tape bombs took us on an adventure in April. In no particular order, here’s what I vividly remember:
- Liberation Day sent equities plunging – the S&P 500 dropped 10.5% in 2 days
- Then we saw a face ripper rally of 9.5%
- The VIX closed over 50
- A deeper trade war with China commenced
- Then a dreaded Death Cross occurred in equities
- Then pundits told us our treasuries were doomed
- And now we get word from hyperscalers like Microsoft (MSFT) and META (META) that the world of AI is humming along just fine
(Luke owns both MSFT and META.)
As painful and unsettling as those trying moments were, rare opportunities came along. We certainly weren’t perfect in our analysis…however, we did shed light and debunk many of the bear-baited myths prophesied by the talking heads.
As I’ve seen countless times in my career, rarely does the crowd grow rich together. Going against the crowd has been the winning ticket.
And MAPsignals was able to shine a vibrant bright light on why rare capitulation tees up some of the best buying you’ll ever get as an investor.
Cheer up, folks!
Our data continues to get more and more constructive by the day. And I believe the next leg higher will be triggered by forced buying…what we tend to see after steep market exits.
And that means, you want to be locked and loaded in stocks loved by institutions.
Capitulation Triggers Forced Buying
When the opportunity is greatest, yell.
Few could imagine a world where equities could work again. We took our cues from repeatable patterns we see time and time again during market washouts.
Basically, forced selling often occurs at market troughs.
More importantly, it rarely lasts long, and it usually prefaces near-term uptrends due to forced buying.
The illustration below shows the 4 circular phases of money flows.
Early April was phase 4 defined by an absence of buyers and record outflows. These are extremely rare events.
But notice that extreme selling often ignites huge buying that occurs in Phase 1:
As investors we must look through the events of the day and focus on tomorrow. This may sound like a passage found in a fortune cookie…however, when you study the evidence, it’s true.
To prove this point, let’s look at 2 recent forced selling episodes.
We’ll be using my favorite capitulation spotting tool, our Big Money Stock Buys and Sells chart.
First let’s use our eyes to spot the obvious relationship between capitulation and soon-followed risk-on behavior.
Here’s 10 years of daily flows. I’ve marked 13 violent outflow periods:
Hopefully with this zoom-out you can spot the opportunity.
When the crowd dumps stocks, you want to take the other side.
Let’s look at the COVID-19 crash as an example. In March 2020, we saw relentless selling that eventually vanished and paved the way to forced buying.
On March 19, 2020 we sent the marines…signaling a great time to buy stocks.
I want to draw your attention to the quiet period when capitulation stopped in late March. As outflows were met with inflows, it took a while before a monster green wave of buying occurred.
This repeatable pattern also can be seen in late 2018.
This pullback was not as nasty as COVID, but the pattern is evident. Capitulation hits, then it stops, and eventually forced buying commences.
Check it out.
The repeatable pattern is occurring now.
Using the same framework as above, look at what’s transpiring. Early April capitulation hit and now we’re witnessing light flows as sell pressure gets absorbed by inflows.
It’s only a matter of time before the forced buying takes hold…an unthinkable thought 3 weeks ago:
Now you understand why we were constructive.
But let’s drive home with some evidence. When we tally all days with 600+ equity outflows, we know that large, mid, and small-caps surge months later.
These meltdowns include the GFC, EU bailout, US debt downgrade, the Flash Crash, and COVID-19.
Market beating returns follow.
Buying indices is good.
Buying outlier stocks is great.
Each of those green bars above are actual discrete equities.
This is where the MAPsignals process shines.
If you are looking for top-ranked stocks under accumulation, get started with a MAP PRO subscription.
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