Note from Michael Salvatore, Editor, TradeSmith Daily: A quick note before we get into today’s enlightening signal study from Lucas Downey. Today is Election Day, and our message at TradeSmith is twofold and mercifully apolitical. Get out and vote today if you haven’t already! It’s your right as an American and one of many reasons this country is so great. Understand that no matter what happens after the votes are counted, and no matter how much volatility we could see in the immediate aftermath, the sky isn’t going to fall, and the sun will rise tomorrow morning. Getting worked up and emotional about elections is par for the course. It’s normal. We’re all feeling it to some extent. But do your best to set aside those feelings as you trade this week. As we and our friends at The Freeport Society have been warning lately, we could see volatility through this week. But it’s no reason to run and hide. It’s a reason to put some money to work in high-quality companies that will prevail no matter who’s riding in Air Force One. (Today’s the last day to hear Freeport’s plan for that, so check it out here while you still can.) And if our research proves right, the next few months could especially favor one often overlooked class of stocks. Here’s Lucas on that… |
Remember, Remember, to Buy in November By Lucas Downey, Contributing Editor, TradeSmith Daily Election Day is finally here. And I don’t know about you, but I can’t wait for it to be over. Polls seem to flip-flop daily, causing stock market uncertainty. Thursday’s volatile trading session likely was partly due to Kamala Harris gaining ground in certain betting platforms. The S&P 500 dropped 1.86%, its largest down day since September 3. The good news is a victor will be upon us eventually… and stocks can get back to business. This is where you should be focused during these whippy trading days. So today. we’re going to do two things: First, we’ll check in on my pullback forecast issued a couple of weeks ago and size up the current outlook there. Then, we’ll look into a signal study that will reinforce the call to own mid-caps this month and beyond. Soon, the election clouds will part. Once the dust settles, get ready for the equity rally to reignite. The Overheated Market Blows Off Steam Back in October, I shared the Big Money Index (BMI) chart, which tracks institutional trading activity. It reached the rare overbought zone, which is the 10th instance since 2018. Zoomed in you’ll notice how since 2022, stocks struggle once we fall out of the red zone:
I waved the caution flag simply due to historical precedent. Below we can see how when the BMI falls out of overbought territory, all major indexes drop, with the S&P 500 down 1.6% a month later. Two months out, the S&P 500 is still in negative territory, and the Nasdaq and Russell 2000 dive too:
A falling BMI indicates that demand for equities is waning. And when those bids disappear, it shouldn’t come as a shock that stocks head south. As promised, I want to update you on the BMI’s latest reading. On October 21, it fell out of overbought territory and currently reads 70%… that’s 10 points below overbought levels. Stocks are no match for a falling BMI. As you can see in this chart updated through October 31, the Nasdaq is off 2.4%, and the S&P 500 has lost 2.54%:
So what’s my message now? Given there’s already been a lot of damage to many stocks, now’s the time to start hunting for deals. As highlighted last week in the stock market election guide of 2024, large-caps tend to struggle a month after the vote. Small-caps historically have been the best near- and long-term bet. Until the election finds a victor, expect equities to have fits and starts. Just know, the dust will eventually settle, and large institutional investors will start shipping money toward certain areas of the market. Here’s where I see the biggest opportunity… Always Remember to Buy (Especially These) in November I love November. The leaves change color. Pumpkin spice fills the air. And stocks rally hard. A few weeks back, I reminded you how November kicks off a seasonally bullish six-month period through April. To revisit that study, here’s the data-driven reason to like mid-caps. Since 1995, November through April averages big gains for the major indexes, with the following: +7% for the S&P 500 +8.35% for the S&P SmallCap 600 +9% for the Nasdaq 100 And +9.35% for the S&P MidCap 400
That brown bar off to the right is where your eyes should focus. Mid-caps crush the November–April period, posting 9.35% gains. But it gets better. This year happens to be a presidential election year. It turns out, mid-caps explode higher beginning in November of election years. When it’s an election year like now, that market-beating performance jumps to 11.83%:
I’ve been building the case to own small- and mid-cap stocks all year. Rates are coming down, and earnings are set to explode for the left-behind stocks. With November gyrations set to subside once we learn which party will take the White House, mid-caps have historically been a wonderful bet. Don’t let the dust settle before getting your buy list ready. That’ll be a mistake. Instead, let TradeSmith help you find the elite under-the-radar stocks loved by institutional investors. The green light is coming. Prepare now. Regards, Lucas Downey
Contributing Editor, TradeSmith Daily | 