In my view, six little numbers can tell you where this market is going.
I love stories like "Moneyball." It's the Michael Lewis book turned Brad Pitt movie about Billy Beane turning the loser Oakland A's into champs. He did it by applying a new methodology to baseball: using statistics or sabermetrics. He'd put no-name athletes on the roster because they could get on base. It worked so well that he changed the entire game. He was also appointed to the board of NetSuite to help the company run more effectively, and it was eventually bought by Oracle Corporation (ORCL) for $9.3 billion.
I use a similar method on stocks. The idea is to observe lots of data and come up with a reliable way to predict repeatable events. These events could be things like getting on base and winning games, but they also may include picking tomorrow's next Amazon.com, Inc. (AMZN) or Netflix, Inc. (NFLX) and figuring out where the market might be in the near and not-so-near future.
Will the stock market crash? Will it soar? Here, I'm going tell you what I believe is going to happen over the next three, six, nine, and twelve months based on history, why I know, and where I am placing my chips.
These days, it's hard to tell what news is important and what's not. I can tell you that the market wants Trump to stay president, but not as much as it wants a China deal. Market reactions to impeachment news aren't nearly as bad as a serious threat should imply. But market reactions to positive news in the China trade war clearly show approval.
For instance, Friday saw major U.S. stock market juice during the day on "Phase 1" of a resolution, as Trump called it. The broad markets all closed substantially higher, but intraday, some growth-heavy indexes like the Russell 2000 were up nearly 3% before giving some back. That's a monstrous day, but is it real or just a head fake?
For that answer, let's get back to baseball. I use a statistical and data-driven approach to stocks. The method served me well through my Wall Street career and ever since. I look at over 5,500 stock every day and use special algorithms to try to identify when big money investors are buying the best stocks. It works really well and has allowed my readers and clients book massive gains on relatively unknown stocks at the time. But I also use the data to get a clear picture of market tops, bottoms, and future direction. It works really well for that too.
You see, the story of the market future is, like many things, not always but often written in the past. When my model scans the 5,500 stocks each day, we get "yellow flags." This is when big money is moving in or out of stocks in a big way. A yellow flag is one step below a buy (green flag) or sell (red flag) signal. To get those, you need an extra high-price or low-price component to become a breakout or breakdown.
Out of all those stocks, we only get a handful of yellow, green, and red flags. I have 30 years of data, but looking back the past 10 years, we normally get 477 yellow flags every day. The average green flag buys are 62, and red flag sells are 44. Out of those 62 buys, we gather them up for a week and sort for the strongest ones. That's how I find my best stocks.
Last Friday, we had a big stock market rally with 666 yellow flags – that's 40% more than the 10-year average, or 2,518 trading days. But we only had 40 green buy flags – that's 35% below average. Does that mean the market approval of the China news is just another head fake to ignore?
Well, I looked back over the past 10 years at days when we got higher-than-average yellow flags and lower-than-average green flags on an up day in the market – just like Friday, Oct. 11. There were 140 times since Oct. 12, 2009. The average rise on those 140 days was 0.96%. What I saw made my eyes grow wide. Here it is summarized in a table:
It tells us that a big short cover rally like Friday looks great for the market. The average return for all six times frames is positive. And, hard to believe as it may be, the S&P 500 was up a year later 135 out of 140 times, averaging 13%. That's 96% of the time.
This tells me that it's a great time to buy the market. That can be accomplished by buying a broad exchange-traded fund (ETF) such as the SPDR S&P 500 ETF Trust (SPY). After recent punishment of tech stocks, a trade resolution should reward tech growth stocks handsomely, so a more aggressive play over SPY would be buying the iShares Global Tech ETF (IXN). It tracks a market cap-weighted index of S&P Global 1200 technology stocks. Of course, one can also hope to outperform by owning the best stocks. Fortunately, you're in the right place.
The news can be confusing, and so can the market's price action. To know what's up today, look for the big money. If you want to know the future, look to the past. Today, it tells us to get bullish. "Education is the passport to the future, for tomorrow belongs to those who prepare for it today." -Malcolm X
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Weak markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.