I was exhausted.

Staring at my screens, I saw a sea of red. Almost every stock was down. A lot.

Volatile market days are particularly busy for options traders, which is what I was back then. I was head of Equity Derivatives North America for Cantor Fitzgerald. It was the summer of 2008, and saying it was volatile was an understatement. The S&P 500 had already fallen 15% for the year.

Little did I know that it would go on to fall 57.69% from the peak to its trough on March 6, 2009.

But that July day, the market felt heavy to me. There was endless bad news, and my personal portfolios were getting mauled. Shifting markets meant I was busier than usual. But it wasn’t fun. People weren’t only getting hurt – they were getting taken out.

Each day, I was spent before I even left for work. Stress was crushing.

Amid the chaos, I called a client to ask him how he was doing. Imagine the pressure of managing billions of dollars. On any given day, he could be losing tens of millions.

But somehow he always seemed happy.

“How are you, John?” I asked carefully.

“I’m great – never better,” he said enthusiastically.

“Are we on the same planet?!” I asked. “I’m looking at market futures down 2%!”

Unfazed, he said, “Yep. Jason – stocks go up, and stocks go down. Today, they’re down.” He sounded like a fortune cookie. What struck me, though, was how calm and relaxed he was. It was almost like he was in a good mood.

He gave me a limit order to buy stock – but well below the premarket price. In fact, John constantly placed orders well outside the trading ranges. His orders were rarely executed quickly – which was frustrating for someone like me who worked on commission.

When I asked him why he did that, he gave another confounding fortune cookie answer: “Patience and process.”

Then, on a really ugly day, the market sank nauseatingly hard. Other clients freaked out, but John was his usual sanguine self. In fact, he was giddy. Many of his buy orders were suddenly getting filled.

His “patience and process” mantra paid off handsomely. When stocks eventually bounced, his lowball purchases looked like all-star returns.

Of course, John’s lesson of patience and process is simple to understand… but difficult to follow.

Patience means waiting for the right setup. Like baseball, we need to just wait for the pitch instead of chasing a trade.

Process means unwavering and unemotional dedication to our strategy. In John’s case, he wanted to buy great companies at discounts. It meant infrequent action but big potential payoffs. What mattered was he was fully committed.

Here’s why I’m telling you this now: Volatility is here. And I expect it will continue for a bit.

To be clear, I’m not talking about anything nearly as bad as the 2008–09 financial crisis. But I do see storm clouds for the near future. And today, I’ll show how we can put patience and process to work for us now.

The Data Is Deteriorating

Hello, I’m Jason Bodner, the editor of Outlier Investor. I spent nearly two decades on Wall Street learning the ins and outs of the financial world. And now, I bring all of my hard-earned expertise to Brownstone Research as I work alongside Jeff Brown.

I use my insider’s knowledge to help regular investors take advantage of Wall Street’s hidden moves. Oftentimes, what appears on the surface isn’t what’s really going on among the big institutional players.

And right now is a perfect example of the disconnect…

Outwardly, markets look great. The main indexes are chugging higher. Casually looking at charts of the Dow Jones Industrial Average ETF Trust (DIA), the S&P 500 ETF Trust (SPY), and the Invesco QQQ Trust Series I (QQQ), an investor might think the weather is fine.

Click to Enlarge

All three indexes are at highs, and their related ETFs are even seeing fresh Big Money buying. Nothing to worry about… right?

But data underneath is deteriorating.

Let’s overlay the Big Money Index (BMI) on the SPY chart.

The BMI is a 25-day moving average of all unusual institutional buying and selling of stocks. When it trends higher, markets follow. When it drops, the 30-year history suggests markets will follow soon after.

And it’s dropping hard.

Take a look…

This tells us that one of three conditions is going on:

  1. Buying is dwindling

  2. Selling is increasing

  3. Both

Right now, we’re seeing both – increased selling with decreased buying. So can we assume that a pullback is around the corner?

Let’s continue looking beneath the market’s glossy veneer for an answer…

Looking at the small-cap-loaded Russell 2000 Index ETF (IWM) offers another clue. It can’t keep up with the other indexes and has been struggling almost all year:

That’s another indication something might be amiss.

Instead, the market right now is being propped up by some big stocks – look at Microsoft, Apple, and Google as examples. Only a handful of great quality companies are doing the market’s heavy lifting.

Large-cap tech, industrials, and banks have been rising lately, whereas China, small-cap growth (including biotech), and gold have been getting hit. Investors are clearly selling growth in favor of old reliable big-cap tech and infrastructure beneficiaries.

And, of course, all of this is happening while we historically expect mixed returns. As I wrote last month, July and August offered a paltry average gain of 0.41% over the past 25 years. This period ends up in the red nearly as much as it does the green.

I believe signs point to a correction in the near future.

So as investors, what should we do?

How To Play a Market Pullback

In times like these, patience and process take effort… but also pays off.

As investors, we shouldn’t worry about the coming storm clouds. In fact, should a pullback come, we should see it as a discount opportunity.

I’d be building my stock wish list right now. Then if any dips arrive, we’ll be ready to buy – just like John was back in 2009. Personally, I’ll want to snap up high-quality growth and tech stocks that have been out of favor the past few weeks.

For a broader opportunity, right now the Russell 2000 Index ETF (IWM) is discounted compared to the rest of the market. Of the four main indexes, it offers the best value, which means it could be an excellent buy in case of an overall pullback.

Of course, if anyone wants to know which specific stocks I’ll target in the event of a sell-off – the ones I think are the outliers of tomorrow – check out more information here.

Ultimately, let’s remember to keep the right mindset when faced with difficult markets. During the collapse in 2008, John was cool as a cucumber. That’s why, near the Great Financial Crisis’ demoralizing low, I adopted John’s mantra.

From then on to this day, I say patience and process.

Talk soon,

Jason Bodner
Editor, Outlier Investor

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