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Caution Ahead and Buy Any Election Dip
Savor this moment. Markets don’t get much better than this.
Add up Fed easing, low inflation, steady growth, rising earnings and plump profit margins, and you’ve got the recipe for the big-time gains we’re seeing.
But with the S&P 500 up a crowd-stunning 38% in the past year, our data-focused stance suggests investors use caution ahead and buy any election dip.
Let’s be real for a moment. Fans of MAPsignals know we’ve been bullish since this huge rally started 2 years ago. That’s because we often recommend going against the crowd when the odds are stacked in our favor.
Nobody wanted to touch stocks in October 2022. But we saw one of the most rare bullish signals flashing green.
In a similar vein, a few data points suggest extreme optimism is baked in the cake right now.
Today, we’ll use our top, proprietary, contrarian indicator to show you why now’s the time to lighten up. Then we’ll highlight what you’ll want to buy on weakness once the dust settles.
To be clear, this bull market’s not over.
We just believe the odds of a tradable, near-term pullback are high and want to help you make the most of it.
White flags are waving.
Warren Buffett famously said: Be greedy when others are fearful and fearful when others are greedy.
Bears are hard to find these days. A year ago, Wall Street strategists sheepishly predicted the S&P would end 2024 pretty flat at 4800. We took the other side on that as well revealing a dozen charts signaling big gains coming for 2024.
Fast forward to today, now strategists are tripping over themselves to publish year end targets over 6000.
The excitement extends beyond the pros. The American Association of Individual Investors (AAII) surveys its 2 million members to see how they’re feeling about stocks?
We track the 4-week average of bullish minus bearish sentiment readings. It’s averaged 6.5% since 1987.
The latest reading has bulls outnumbering bears by 18.6% – about triple the long-term mean – easily in the top quartile since the late 80s:
OK, here’s how this helps you make money.
Check this out: Stocks cool off after sentiment gets too bullish. The S&P 500 has returned a below average 2.6% in the six months after frothy AAII bullish sentiment readings like we’re seeing right now:
The good news is a healthy digestion period for stocks offers you a buy the dip opportunity.
And the better news is when MAPsignals’ proprietary data agrees.
Let’s take a look at MAPsignals’ most popular money flow indicator to see if it’s sending the same cautious message.
Here’s how our Big Money Index (BMI) works: Readings under 25 indicate stocks are deeply oversold and it’s time to buy. Conversely, rare readings over 80 indicate stocks are way overbought and a pullback looms.
Subscribers know we’ve been nailing major market pivot points with it for years.
Let’s see what the BMI is telling us now.
It’s sending the same cautious message as the frothy AAII investor sentiment survey. After reaching the rare overbought zone above 80 recently, it’s just fallen out of it.
Check out this chart of the BMI. Notice how the yellow indicator typically declines abruptly once the 80% threshold is breached, highlighting that demand for equities is shrinking and sellers are slowly taking over:
This gravitational tug often spells near-term pain for stocks. Check out the chart below.
Since 2014, the average 2-month return for the S&P 500 post this caution signal is -2.1%. The tech-heavy NASDAQ 100 sees a similar decline of -1.5%.
The more-volatile S&P Small Cap 600 fares worse with an average -4.3% over the same period.
Let’s unpack this further to understand what’s actually happening from a supply and demand perspective when the BMI is shifting course.
Forget the media headlines that change with the wind. Instead, focus on institutional money flow.
The Big Money flows in 4 phases:
1. Huge buying and little selling (think early October)
2. Buying slows & selling grows (where we are now, typically near an interim peak)
3. Buying slows further, selling takes over (a correction hits)
4. Buyers are gone, sellers are in control (rare oversold conditions, the best buying opportunity)
We appear to be entering into phase 2 with the BMI heading south.
Before you panic, keep in mind that these phases can shift quickly. Sometimes equities fall fast…other times it’s a slow slog.
This is why it’s critical to follow the BMI in real-time.
Good buying opportunities arise in phase 3. That’s typically where most pullbacks end.
Rarely do we ever reach phase 4 which is defined as a truly oversold market… the last one occurred last fall, when the BMI slumped down to a super-low 17. It was rightly telling you to buy right as stocks were bottoming out. The S&P 500 is up over 40% since its October 2023 low at 4103.
It pays to follow the money!
Frothy investor sentiment and a toppy BMI both point to high odds of a near term pullback. That’s a powerful 1, 2 punch!
But to be clear, this is a tactical call. This bull market isn’t over.
Think of this as a pause that refreshes.
OK here’s your buy any election dip playbook.
Once the dust settles, stocks have done very well historically after presidential elections looking out beyond the first couple of months.
Since 1988, the S&P 500, NASDAQ 100 and the Russell 2000 have all posted strong 3M, 6M and 12M post-election gains with small caps leading the way (chart).
The prior 9 Presidential election days saw the following 12-month returns:
- The S&P 500 jumped 15.3%
- The NASDAQ 100 leaped 17.6%
- And the Russell 2000 galloped 20.4%
Election jitters are a gift for the prepared investor.
Let’s wrap up.
Use caution ahead and buy any election dip. Portfolios have enjoyed an amazing run and history suggests a healthy pause is due.
Warren Buffett reminded us to fear greedy environments.
Frothy investor sentiment and a toppy BMI both point to high odds of a near term pullback.
But be tactical. This bull market isn’t over.
Think of this as a pause that refreshes.
Just don’t get too overly bearish. Here’s why you want to buy the dip:
Once the dust settles, stocks have done very well historically after presidential elections looking out beyond the first couple of months.
Since 1988, the S&P 500, NASDAQ 100 and the Russell 2000 have all posted strong post-election gains. Small caps have outperformed with 9.3%, 10.6% and 20.4% average gains over 3, 6 and 12 months, respectively.
That’s a historical vote of confidence if you ask me!
If you want to find specific large-, mid-, and small-cap names ramping with Big Money support, get started with a MAPsignals PRO subscription. It’ll get you access to our portal that updates every morning, showcasing the exact tickers being bought and their scores.
Our prized Top 20 list is full of small-cap market beaters. This is the report that found every winner in our research.
The opportunity is there. You need a map to spot it!
Invest well,
-Alec Young
MAPsignals
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