Further Upside for Stocks
When investors give up on stocks, there’s usually opportunity.
That’s been our message the last month. Recently, our data is signaling less selling in stocks. Slowly the market is becoming more constructive. This could signal further upside for stocks.
What a difference a week makes. Just as investors were digesting an awful June CPI print where inflation rose 9.1% year-over-year, our data was pointing to a contrarian bullish setup. Our Big Money Index was reaching oversold conditions. Historically, that’s a great time to buy stocks if you’re a long-term investor.
The rare green zone triggered on Friday morning and since then stocks have blasted higher. And while this is positive on the surface, there’s more to this rally than meets the eye.
As I’ll show you, institutional investors have dialed back their equity risk to levels indicating peak pessimism. Not only that, some of the weakest areas of the market year to date are beginning to lead. I know it’s not popular to say, but there’s a case for further upside for stocks…at least near-term.
Let’s first jump into the data.
Oversold Signal Triggers Rally
There are periods when selling gets overdone. Often, those moments can trigger a relief rally like a coiled spring being released. Last Friday, our Big Money Index (BMI) briefly dipped into oversold territory.
The BMI tracks our daily buy and sell signals on a 25-day moving average. Reaching 25% (oversold) means that over the prior 5 weeks, only 25% of our signals have been buyers. That’s rare.
We didn’t stay oversold for long. Stocks have ramped in a big way since.
Below I’ve circled Friday’s oversold signal and May 24th’s oversold signal. Both prefaced a strong relief rally:
As of this writing, the S&P 500 is up 4.3% since Thursday’s close. As you can see above, the BMI has been rapidly climbing. That’s due to selling slowing.
At MAPsignals, we believe stocks and markets move due to one force: supply and demand. Registering extreme bearish readings in our data indicates sellers have been in control YTD. To illustrate how ugly the selling has been, check out the Big Money Stock Buys and Sells Chart.
These are the daily total of buys and sells in our data. In 2022, incredibly just over 70% of signals have been sells:
That’s a lot of red. When sellers outnumber buyers 2 to 1, it’s logical that prices fall. And this data lines up with a recent survey out of Bank of America. This week they released a chart showing how investor allocation to stocks fell to an area nearing 2008 levels:
This aversion to risk has clearly been a driver of the bear market. And in times of despair, I find it important to be proactive.
Two hard hit areas are beginning to show signs of life.
Further Upside for Stocks
So now let’s look at further bullish signs for stocks.
A few weeks ago, I made the case for two sectors primed for upside. Some of the hardest hit areas of the market were discretionary and technology stocks.
Both groups have faced relentless selling due to soaring inflation and rising interest rates. As I showed, up until June, nearly 9 out of 10 signals in those sectors were sell signals. Extreme bearishness is an understatement.
Since the market lows made on June 16th, both sectors have staged an impressive rally. In just over a month, the Consumer Discretionary Select Sector SPDR Fund (XLY) which is a great proxy for the discretionary sector, has ramped 13.36% vs the market’s climb of 7.48%:
Source: FactSet
Now take a look at the tech space. The Technology Select Sector SPDR Fund (XLK) has ripped 11.66% since the market made lows:
Source: FactSet
When some of the weakest areas of the market begin to lead, pay attention. We could be looking at a rotation into more growthier groups in the coming days and weeks.
And this is spot on with Alec Young’s recent views to buy growth over value. I couldn’t agree more!
If markets keep heading higher, our data could slowly show buyers stepping in. And what a welcome change that would be.
When it’s time to buy, it’s usually when all hope is lost. Finally, signs are favoring the bulls!
Let’s wrap up.
Here’s the bottom line: We may have reached peak bearishness over the near-term. An oversold Big Money Index coupled with historically low investor appetite for stocks, creates a cocktail for higher stock prices.
New leadership is emerging in some of the hardest hit areas of the market: Discretionary and Technology stocks are rallying hard. Plenty of high-flying growth stocks are beginning to awaken.
All that’s left to give me high conviction is solid buying in our data.
If the macro headwinds begin to take a backseat, odds are we’ll see prior growth leaders getting bought.
A few names are already seeing green. That signals further upside for stocks.
***If you’re wanting to follow our Big Money signals in the coming days, get started with a MAPsignals subscription. In our portal you’ll have access to the Big Money Index, stocks, ETFs, and more. Let data help inform your investing.