Stocks Bounce From Oversold Levels

If you want to divide a room, ask a group of investors their forecast on the market in 2022.

If you want an unemotional narrative of the stock market, follow data. Today’s message is simple: Stocks bounce from oversold levels.

There’s every reason in the world to NOT own stocks. Let’s run through a few of the fears: high inflation, rising rates, Russian war, and quantitative tightening (QT). I feel like I can go on and on, but you get my drift.

But following data has a way of telling a different narrative … an emotionless story. As I’ll show you, the data is getting more bullish. And the Big Money trends keep working.

Let’s get to it.

Stocks Bounce from Oversold Levels

The Big Money Index reached lows last week. Wednesday morning (May 25^th) signaled oversold conditions. That’s our most bullish near-term signal. Usually when it hits, valuations are attractive. We haven’t seen this level of selling since March 2020.

But get this, since then the BMI has rallied to 32%. Check it out:

BMI breaks above oversold line | Big Money Index

A week ago, the BMI fell to 22% (25% and lower is oversold) and as of this morning sits at 32%. A rising BMI tells us either that buyers are back OR that massive selling in stocks has slowed. As I’ll show you, the recent bounce from May 25^th is due to the latter.

If you want to see a rally, traders must stop pressing the sell button. And they have. Below you’ll see how selling has vanished since Tuesday May 24th:

Big Money stock buys and sells | BMI ramping due to less de-risking

Since those big red bars stopped, markets flew higher. That’s how the market works. Capital continuously rotates in phases like waves in the ocean. But when everything gets sold in unison like recently, violent snapbacks can occur.

As a reminder, here are the flowing phases of Big Money:

Huge buying and little selling
Buying slows and selling grows
Buying is gone, sellers are in control
Selling slows, and buying grows

Below is a diagram. If the BMI keeps rising further, we would be exiting phase 4:

This image demonstrates the cyclicality of markets. We just witnessed extreme levels of selling and now the relief rally has started. We’ll need more data to flow through before buyers show up.

Selling must exhaust itself … and signs are pointing to that being the case. Until the BMI stops lifting, markets could keep climbing in the short-term.

Now let’s look at where our data has been finding promise lately.

MAPsignals Stocks Outperform

Normally when the BMI ramps from oversold I beat the bull drums from the mountaintops. Today, however, I’m beating them from the oil patch. Here’s why.

Every week our process profiles the Top 20 stocks getting bought by Big Money. These are stocks that score high fundamentally with growing sales and earnings. Out of 500 stocks that get bought and sold each week, these are top shelf!

But to isolate the stellar leaders over time, we have a monthly process that ranks the 50 stocks getting bought the most over the prior 6 months. This is where we find the outlier stocks in our process.

Well, the MAP 50 for MAY has been performing very well, more than doubling the S&P 500 (SPY ETF) in the last few weeks. That’s due to it’s 26% concentration in Energy and 10% weighting in materials names.

Check out the performance below:

MAP Portfolio vs SPY | MAP 50 outperforms SPY ETF

That electric blue line is the average performance of the May basket, with a 6.44% gain … easily beating the market’s ramp of 2.37%. That outperformance is mainly a result of oil and gas stocks raging, literally since January. So, while the market stages a relief rally, Big Money favorites are juicing even higher.

Many of them are still breaking out as stocks bounce from oversold levels. While headlines remain dreary, the Big Money process spots the promise.

Let’s wrap up.

Here’s the bottom line: I’ve repeatedly stated how oversold markets are generally great opportunities to buy beaten down companies. It’s a rare gift to investors and 2022’s pullback is falling in line with that narrative given the bounce we’re seeing.

As de-risking grinds to a halt, stocks rise. That’s very positive.

For a true bottom to form in stocks, we’ll need to see macro headwinds dissipate. Eventually they will. Then buyers will step in.

My bet is the Big Money will lead the shift.

***And if you’re ready to kick your investing game up a notch, get started with a MAPsignals subscription today. Let data be your edge!