Unusual trading signals in individual stocks have historically been able to forecast a market about to fall. These warnings also provide a heads-up for opportunistic entry points. On Oct. 12, we published an article saying we expected the markets should fall an average of 5.29% and that it should take an average of 13 trading days to happen.
This is very valuable for those on the sidelines waiting for a pullback in this multi-year bull market. I wrote about a threshold that had been triggered that historically precedes a big fall in the market. This provides an opportunity for patient investors because they can pick up stocks at a bargain. Because the signals are so rare, we pay close attention when they happen.
So, why this update? It's because having a playbook for the next sell-off can help those looking for an investing opportunity. Being able to view the market in an unemotional way can lead to smart decisions when they present themselves.
The following is a quick summary followed by a few stats compared with our expectations:
On Oct. 10, 2018, we sent a report that our buying/selling ratio was preparing us for an average market drop of 5.29% and an average of 13 trading days to get there. The accuracy was uncanny, as the SPDR S&P 500 ETF (SPY) fell 5.19% to its low 13 days later (Oct. 29, 2018). Meanwhile, the iShares Russell 2000 ETF (IWM) fell 6.32% to its low 10 days later (Oct. 24, 2018).
A few observations since this report was published:
- The market traded lower, which was expected.
- The average trading days until reaching the local bottom historically was 13. After this report, SPY hit lows 13 days later, and IWM hit lows 10 days later.
- The average return of IWM until the local bottom historically averaged -5.29%. After this report, SPY returned -5.19% at the low (Oct. 29, 2018), and IWM returned -6.32% at the low (Oct. 24, 2018).
In the chart below, you can see the date the report was sent highlighted by a red circle with yellow fill:
The Bottom Line
Unusual trading signals can provide opportunity. Long-term investors can unemotionally use history as a playbook for success. Pullbacks and oversold markets have been great chances to scoop up great stocks. Our long-term view is bullish on the market, and we feel that extreme pullbacks offer buying opportunities for the long run.
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Disclosure: The author holds no position in the aforementioned securities at the time of publication.