A Major Money Flow Reversal Is Coming By Lucas Downey, Contributing Editor, TradeSmith Daily If your portfolio has been stuck in the mud recently, you’re not alone. Stubbornly high interest rates, tariff worries, and earnings season jitters are just a few headlines keeping investors uneasy. But none of these are the real reason stocks are starting the year bumpy. It’s actually a lot simpler than that… The real reason stocks are under pressure is due to money flows. After two strong years of market returns, traders decided to pare back risk. And not just any traders, but the deepest pockets on Wall Street. As ugly as that sounds, keep in mind that stocks oscillate from overbought to oversold depending on the environment. And right now, we’re approaching a level of selling that we tend to see right before a powerful shift in two of my favorite areas of the market: small caps and mid-caps. While the all-clear signal isn’t here yet… It’s drawing closer. When you review the evidence, you’ll see how big of an opportunity awaits. Before we get to today’s powerful signal study, let’s first digest the latest fits and starts of the market… | Recommended Link | | | | According to a campaign official, President Trump’s first day will be “like nothing you’ve seen in history.” That’s why legendary investor Louis Navellier, who correctly predicted Trump’s win… Is now issuing this urgent warning about Trump’s inauguration. |  |
The Big Money Index Is at Levels Not Seen Since November 2023 Three months ago, I pounded the table to buy stocks in November. If you recall, back in mid-October, pre-election worries were causing plenty of volatility. We were ahead of that volatility because we follow one of my favorite indicators, the Big Money Index (BMI). As a reminder, the BMI tracks unusual money flows on thousands of stocks and plots the trend. Here’s a snapshot of the BMI from that October post when it was in the red zone: 
I waved the caution flag back then, with a study highlighting that when the BMI falls out of overbought territory, stocks tend to struggle and show negative performance. That’s exactly what we got. When big money flows out of the market, selling pressure rises and prices fall. That’s supply and demand 101. On the flipside, whenever selling pressure reaches high points, it often precedes oversold relief rallies… which we’re approaching now. Check this out… Here’s an updated BMI overlaid on the small-cap iShares Russell 2000 ETF (IWM). Given that small caps and mid-caps have seen most of the outflows and negative returns lately, it’s a great visual barometer of where much of the market pain is hiding. The BMI has reached levels last seen in November 2023, below 40%. Importantly, we’re inching closer to the green line… an oversold market, when the BMI registers 25% or lower. I’ve circled prior instances when we hit oversold territory: 
Notice how oversold markets tend to appear during trying times like the high-inflation environment of 2022 and October 2023. Also notice that these are great setups to own stocks. Markets bounced shortly after. To be fair, we’re nowhere near oversold territory today… But if the current rate keeps up, it would take weeks to reach the green zone. So, why am I telling you this is a good situation? Let’s check history… Money Is Flowing Out of Stocks… and That’s Good for Mid-Caps Telling you to buy mid-caps in November may seem like a miss. After all, since then the S&P MidCap 400 is roughly flat. You can see that with the SPDR S&P MIDCAP 400 ETF (MDY), which tracks that basket. Also to note, mid-caps are off 7.5% from their late-November highs. 
To most, this chart may look unexciting. However, when you cross-reference a BMI that’s below 40%, it reveals a bullish pattern. Here’s the signal… Back to 2014, roughly 10 years, there have been 359 days where the BMI had a reading below 40%. Looking forward, small caps and mid-caps saw market-beating gains with: - Three-month average gains of 7% and 7.3% for the S&P SmallCap 600 and S&P MidCap 400, respectively
- Six-month gains of 7.7% and 9.7%
- 12-month jumps of 18.5% and 19.3%
With potential gains like this, you should be happy about the latest market gyrations. Eventually selling will dry up and demand will pick up, sending high-performing smaller stocks higher. Could there be some more downside in the near term? Absolutely. But remember, the closer we get to oversold territory, the bigger the opportunity. I’ll say it one last time: Money is flowing out of stocks, and that’s a good thing for long-term investors. Eventually money flows will flip to the upside, and a mega rally will ensue. Don’t wait for it… Start building a buy list today. Focus on high-rated stocks by using TradeSmith’s software. Here’s an example where two ranking systems score very well for the same stock. Cal-Maine Foods (CALM) is an egg producer. I’m sure you’ve felt the rising prices of eggs the last couple of years. Cal-Maine is a pure way to play this trend. It just reported stellar second-quarter earnings, with $954.7 million in sales vs. last year’s haul of $523.2 million. This big beat translated to the bottom line with a second-quarter earnings per share of $4.47 vs. $4.05 estimates. With numbers like that, it’s no surprise that the stock has been an outperformer the last year, gaining 108% vs. 23% for the S&P 500. Here you can see the one-year chart alongside Louis Navellier’s stock grader putting CALM as A-rated: 
But there’s more to CALM that gets me excited. It has a Quantum Score of 75.9, well into the buy zone. Above 70 with healthy fundamental and technical scores is what I like to see: 
TradeSmith can help you spot tomorrow’s winners by utilizing cutting-edge software. Money is flowing out of stocks… Make it an opportunity! Regards, Lucas Downey
Contributing Editor, TradeSmith Daily Note from Michael Salvatore, Editor, TradeSmith Daily: On Monday, Jan. 20, the first non-consecutive two-term president in nearly 150 years will take office. Suffice to say, it’s a historic moment. And the next 100 days could become some of the most volatile we’ve seen in years. Whether stocks wind up higher or lower from now until then, master trader Jeff Clark has a plan to make a ton of money. This week, I’ll sit down with Jeff to talk about what he expects from the second round of a Trump White House, and which sectors are set to thrive or dive. You can watch that interview in Saturday’s edition of TradeSmith Daily. In the meantime, make sure you sign up for Jeff’s live event, The Most Profitable 100 Days of Your Life, and discover how to make the most of this historic trading window. After all, Donald Trump’s aggressive policies are poised to send shockwaves through the markets. And Jeff says he’s uncovered a pattern that could be the key to potentially doubling your money weekly during Trump’s first 100 days in office. You can register for this free event by clicking here. | 
