We Have Stock Market X-Ray Vision

We all want our stocks to go straight up. I know I do.

But as anyone who’s invested in the markets knows, nothing ever goes up in a straight line. Prices zig and zag.

Stocks go up. And down. And back up again.

We got a reminder of that last Friday.

After a week of smaller drops, a swath of selling hit the market – and stocks felt the pain.

From June 14 to 18, the S&P 500 fell around 2%, with the biggest drop occurring that Friday.

Many of us probably wondered, was this the start of another “big one”? I’m sure some investors were a little scared. But we make our worst decisions when we’re afraid.

As readers know by now, instead of focusing on the news headlines or emotions, I turn to data for answers. Here’s what I found…

When We Can Predict Volatility

As readers of The Bleeding Edge know, my name is Jason Bodner. I’m the editor of Brownstone Research’s newest research product, Outlier Investor.

We launched Outlier under the Brownstone Research banner earlier this year. I was thrilled to have Jeff Brown beside me as I launched this new venture. And I was even happier to get his full endorsement. Like me, Jeff believes in quality of research above all else.

My mission with Outlier is to pinpoint the outlier stocks that break all the rules. These are the stocks that surprise everybody and turn modest investments into incredible returns.

Like I mentioned above, we don’t find these outliers by following the mainstream narrative. We rely on cold hard data.

Specifically, I use my proprietary system to track the “big money buying” that lifts great stocks higher and higher.

So what’s my system saying about the recent market action?

The first thing we should understand is that June 18 fell on a “Quadruple Witching” day.

That’s when four different types of derivatives expire simultaneously: stock index futures, stock index options, stock options, and single stock futures.

I know what we’re thinking. It sounds spooky.

But this event is very common. It occurs predictably on the third Friday of March, June, September, and December. And it often leads to high trading volume.

This simultaneous expiry can whip the markets around as profitable options and futures contracts settle and others are closed or rolled out to a new date. That’s precisely what happened last Friday.

And when it comes to Quad Witching days, this sort of action is par for the course.

I went all the way back to 2015 and looked at the S&P 500’s returns on Quad Witching days. See for yourself.

Only three out of the 26 periods going back to 2015 were positive. That means 88.5% of the Quad Witchings in that time were down days.

In other words, we can confidently ignore June 18’s dip as standard business…

And the market appears to have already brushed it off. Like clockwork, the S&P has nearly recovered to its previous level.

So, is it time to panic? Not at all.

In fact, something very constructive is going on in the market right now.

X-Ray Vision for the Stock Market

Like I mentioned above, my system tracks “big money buying.” In essence, we’re looking at where the “big boys” are deploying their capital. Remember, our strategy at Outlier Investor is to find great stocks that this big money is pushing higher.

Taken together, this system is like X-ray vision for the markets. So what does our X-ray vision see today?

There was some interesting rotation action going on last week. Have a look at the table below.

The green bars represent what the big money is buying. The red bars show us what is being sold.

Energy and tech were being bought up (Jeff should be happy to hear that). Meanwhile, financials, industrials, materials, staples, and utilities were being sold.

And interestingly, much of this buying was centered around companies my system identified as “outliers.” That means these are companies with strong fundamentals. Of the 294 stocks bought last week, 86 were prior outlier stocks.

Here’s what we should take away…

The Quad Witching action last week probably spooked more than a few investors. And the mainstream financial press had a field day talking about it.

But we rely on data. Data doesn’t lie. And right now, the data tells us that big money is selling companies with poor fundamentals. And growth companies – particularly tech – with strong fundamentals are being bought up.

So let’s not let the volatility shake us out of great positions. And let’s certainly not allow the volatility to keep us up at night.

Long-term investors like us see incredible returns when we find a winning formula and stick to it.

We’ve got a winning formula with our Outlier strategy. Let’s stick to it.

Mailbag

Dear Jason, Thank you for the video updates! Right now the market reminds me of the Hold’em tables in the mid-2000s. Wild games. Wild swings. Good reads, solid plays, patience, and a little luck take the money. You and Jeff know how to read and play them. I play within my means and have the patience of the saints, so it’s all good. With that said, DAAAAAMMMN!!! Yo mama dressed you funny! Sincerely,

– Shawn S.

Shawn – there’s an old saying: There are old traders and bold traders, but no old, bold traders. The same goes for poker. If you’re constantly bold, you can’t hope to last.

Hold’em is the only casino game with a theoretical edge for the player – not the house. The real goal is to keep playing and lean in big when you know have odds in your favor.

That’s how I invest, too. You have to know when to hold ’em, know when to fold ’em, know when to walk away, and know when to run.

This photo of me as a young cowboy just proves maybe I can be bold after all…

Hey, Jason, I just want to point out the so-called “green” and “renewable” energy stocks are not even in the Energy Sector of the stock markets. They are classified as Utilities! This kind of makes sense because they don’t really produce much actual net energy. They are much more a gimmick or a meme than any significant source of energy.

– Thomas R.

Hi, Thomas – Technically, many harvest energy! The idea is indeed a great one. I’m all for a cleaner planet, but it comes with all sorts of side effects that we don’t talk about. We have to dispose of the batteries when they die. We have to mine for the lithium.

As far as a gimmick, anything that captures public excitement will always be the gimmick of the moment. Remember internet stocks? Remember REITs? Remember oil stocks?

The thing is, all ideas wax and wane in popularity, but the real key is to find the outliers of each. They perform regardless of popularity!

Thanks to everyone who’s written in with questions and feedback. If anyone has a question you’d like answered in a future mailbag, please send it here.

Regards,

Jason Bodner
Editor, Outlier Investor

P.S. If you’d like to learn more about our strategy at Outlier Investor… and how to join us… then go right here for all the details.

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