I remember when I was kid, I played a lot of Nintendo video games.
Sometimes I thought I’d reached the end of the game. I figured the mighty boss level was next… only the fun kept going.
I found the secret bonus level!
It was a secret level designed to load up on supplies and strength before the next big battle.
The funny thing is- I think that’s where the stock market is now.
Indexes are very overbought and they are staying that way.
This is the investing bonus level!
While the market racks up a lot of points…investors can rack up a lot of gains.
Instead of cashing out and waiting for the pullback, you should enjoy the bonus level.
When it ends, it may be time to face the boss, but you may be way better prepared…
Welcome To The Bonus Level
Markets tend to overshoot when going up or down.
It’s like jumping into a pool. You don’t hit the water and stop immediately. Momentum keeps your body headed towards the bottom. Only once that energy dissipates can the air in your lungs float you to the top.
So, while obvious consensus is that stocks are heavily overbought, the thrust of momentum can keep us that way for a while.
It’s like the laws of motion: they exist even if we don’t want them to.
We should accept the movements of bodies and markets for what they are.
The problem comes because we are human. And humans are emotional.
Humans tend to get especially emotional with their wallets.
When it’s time to buy, many won’t out of fear.
And when it’s time to sell, many won’t out of greed.
We know that emotions can do real damage to logic. That’s why they have little, if any place in investing.
US stocks have been overbought for 2 weeks now. While it may not feel normal, it is. Markets historically have stayed overbought for a while. But take it for what it is: staying overbought is the investing bonus level.
30 Years Of Investing Bonus Levels
We went back deep into our data to see just how long overbought markets can last.
Since 1990, the Big Money Index was overbought 18.3% of the time.
This was spread across 67 instances.
The longest overbought period was 68 trading days which is more than 3 months!
The shortest was 1 day.
Here are the average returns for stocks once we reach overbought:
This data says that overbought markets don’t always mean lower prices.
Even if investors anticipate markets to pullback, these are really times when exuberance happens.
You don’t want to skip the investing bonus level. You can rack up a lot of points and value.
That’s because great stocks can fly to amazing heights. I don’t mean just any old stocks- I mean the outliers. The Michael Jordan, Wayne Gretzky and Tom Brady’s of stocks. History shows that 100% of the stock market’s gains above treasury bills come from only 4% of stocks.
This is from 1926 until 2018. Those are outliers.
Outlier stocks usually do especially well in overbought (bonus level) markets.
But nothing lasts forever; the bonus level always ends. There’s always a big bad boss to face.
The question is: “when?”
The Big Money Index Has Plateaued
We find all our answers in cold-hard data. The nuances are in when the data changes.
If you remember last week, we told you to always follow mama goose. That’s because we noticed that the Big Money Index had peaked: that’s a change.
But even though the BMI stopped rising, it can go sideways for a long time.
The key is to watch for when it starts to fall because it can do so just before a market cracks.
Here, let’s have a look at a zoom-in on the Big Money Index.
I’ve circled what is important.
Notice how in January the BMI starts falling before markets fall.
The last time the BMI started falling after reaching a peak was January 30th.
Back then, markets were also extremely overbought.
That’s when we signaled ch-ch-ch-changes.
But if you recall, indexes kept rising for weeks while the BMI was falling.
That’s when we became cautious because the data shifted and diverged from the market.
As for what that means for now (the right side of the chart) we aren’t at a cautious point yet.
We’re still in the investing bonus level.
When the BMI starts falling from here – that’s when to prepare for a pullback.
Outlier Stocks Win The Game
Above, I mentioned outlier stocks and we’ve devoted our lives to finding them.
We succeed because we follow the big money. Big institutional money is constantly pouring into stocks with superior fundamentals. That’s where we fish for outliers.
If you want to make big money, follow the big money into the best stocks.
But don’t take my word for it, history has proven it.
Take Hendrik Bessembinder’s study, Do Global Stocks Outperform US Treasury Bills?
In this awesome huge paper, one key concept struck us speechless: 4% of stocks are responsible for all of the gains above treasury bills.
Taking it one step further, 1% of stocks account for 50% of the gains.
That means, if you want to be in the 1%, you gotta be in the 1%.
If you’re not in the 4% of stocks – you are making a costly mistake.
Finding them is the hard part, but luckily that’s all we do at Mapsignals.
Trading in and out of them is all well and good, but to make monster returns – you need to hold them.
Imagine if you had the chance to buy Apple or Netflix in the teens… but sold in the 30s pocketing a double. It may have felt good, but now it probably feels awful forgoing thousands of percentage gains in favor of a quick double.
Once you get some outliers in your portfolio, you’ll want to keep them. That way any year can seem like an investing bonus level. Maybe not every year, but the best stocks have one thing in common.
It’s a mantra we have here: TAGU. They all go up. They = outliers.
So, while you mentally prepare for the eventual pullback – make sure you enjoy the investing bonus level. But keep thinking long-term and focus on those outliers which can pay you big time in the investing bonus level.
Like right now…
For more information on how we find outlier stocks, and how you can get them – click right here.
Disclosure: I own shares of Netflix.