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Stocks Bounce From Oversold Levels

June 1, 2022 //  by Lucas Downey//  2 Comments

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.

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 25th) 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 25th 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:

  1. Huge buying and little selling
  2. Buying slows and selling grows
  3. Buying is gone, sellers are in control
  4. Selling slows, and buying grows

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

Big Money flows in phases

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!

Lucas Downey
Lucas Downey

Lucas is co-founder of MAPsignals. His full bio can be found here.
Prior to MAP, he was Head of ETF Sales at Cantor Fitzgerald & SVP of Derivatives at Jefferies, LLC.

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Category: All, Big Money Insights Weekly

Previous Post: «MAPPING BIG MONEY FLOWS SUPERCHARGES INVESTMENTS Mapping Big Money Flows Supercharges Your Investments
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Reader Interactions

Comments

  1. Richard

    June 3, 2022 at 8:34 am

    On the Big Money sector charts there are two lines included: the Buy SMA 25 and the sell SMA 25. Each line has an associated positive or negative number for the day, example Buys 25 SMA .72, Sells 25 SMA -20.64. Can you explain this information or direct me to the information?

    Reply
    • MAPsignals Staff

      June 3, 2022 at 8:52 am

      Hi Richard,
      Those lines are 25-day moving averages of buys and sells. The idea is to show peaks and valleys of extreme buys and sells over time. When selling exhausts, the sell line will move up. When buying is extreme, the line will fall.
      Hope this helps !

      Reply

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30 Jun 1542518642461384709

The first half of 2022 is in the books.

The #bearmarket has sent #stocks tumbling.

Today, @LukeDowney reviews how sectors performed YTD and highlights two #sectors primed for upside. $XLY $XLK

Read here: https://mapsignals.com/map-blog/two-sectors-are-primed-for-upside/

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#Capitulation #BearMarket2022 #StockMarketSelloff
Stock market capitulation is here. In this video, Luke dives into what capitulation is and what it means for stocks. Check out our latest blog post: https://mapsignals.com/map-blog/

What does capitulation mean for markets? It is when there's no leadership and investors throw in the towel. You've heard the saying, "sell first, ask question later?" That's how Wall Street thinks.

But these rare moments often lead to bargains for stocks. Capitulation can often lead to bottoms being formed in stocks.

As Lucas Downey shows, these moments are usually when investors should focus on quality companies in this bear market environment. Long-term is the best mindset in a bear market.

The best stock market analysis we've found is following the Big Money. MAPsignals doesn't argue with data.

Learn more at www.MAPsignals.com
Remember this is not personal investment advice of any kind. This video is for entertainment purposes only. Our focus is to help investors make sense of markets with data.

Our disclaimer can be found here: https://mapsignals.com/contact/

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Stock Market Capitulation is Here | Bear Market 2022
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