The Big Money Index (BMI) breached oversold territory last week, with “buys” making up fewer than 25% of all signals. As I’ve been sharing, this is historically a very bullish sign near term for stocks.

And so far, it has played out that way. Since going oversold, the SPDR S&P 500 ETF Trust (SPY) has rallied nearly 5.5% from trough to peak.

And here we are, only three days later, and the BMI has already popped back above 25%…

So what does this mean?

Will we go oversold again? Will the market rally to new highs? What can we expect for the next few weeks and months?

Today, I’m going to answer these questions… and offer a framework for what to expect in the near future for the stock market.

Tracking Money Movements

I’m Jason Bodner, the editor of Outlier Insights. I spent nearly 20 years on Wall Street. During my time there, I handled some of the largest stock orders on the planet for some of the biggest investors out there. Some of them are household names.

And while handling those orders, I learned that Big Money is really where we should focus our attention. That’s because it is ultimately the mover of markets.

I took my knowledge from Wall Street and developed a system that allows me to track Big Money investors moving in and out of stocks in real-time.

As a refresher, the BMI helps track these money movements in and out of stocks. It collects all unusual buy and sell signals and smooths them on a 25-day moving average.

This allows us to get a sense of if money is moving in or out of the market overall.

And when things get extreme – either overbought or oversold markets like now – the BMI should grab our attention.

When it pops above the red line, we can expect the market to be overbought and soon fall.

And when the BMI pierces oversold, then selling becomes unsustainable… and we can expect the market to revert higher in the near term.

Going oversold is a rare event averaging just once every year and a half for the past 30 years.

So the fact that it went oversold last week is worth talking about. Ordinarily, it takes around 20 days for the market to come out of oversold territory.

But this time, just three days later, the BMI now sits at 30%.

So does this mean our buying opportunity is gone? Has the ship sailed?

Where We’re Headed

The first thing to know is that going oversold is what matters… not the length of time we stay oversold.

Whether the BMI just kisses oversold or stays oversold for a longer period, the forward returns historically are excellent.

Based on data going back to 1990, the forward returns after going oversold looked like this on average:

  • 1 month: +2.8%

  • 3 months: +6.3%

  • 6 months: +9.6%

  • 9 months: +11.3%

  • 12 months: +16.0%

  • 24 months: +29.2%

This included recessions, periods of higher interest rates, lower interest rates, September 11th, the Great Financial Crisis, and so on.

And while it may take some time before we hit new highs, history says that’s where we’re ultimately headed.

Now, someone recently asked me if the BMI could go oversold again in the near future.

While this is possible, I don’t think it’s likely. Over a period of time, to generate a buy signal, stocks must eclipse a recent high from a period of about 11 weeks.

The opposite is true for sell signals, too. Stocks must break 11-week lows with extreme volume to generate a sell signal.

Looking back 11 weeks ago, the S&P 500 (SPY) was higher. Overall, stock prices were higher.

Yet as time rolls on, those highs start to fall – just as the market has fallen.

So to create new buy signals, stocks have less height to climb. Yet sell signals have steep recent lows to break to get new sells as time goes on.

That means it’s likely the BMI will find it easier to tick back up in the coming weeks.

It’s Time To Go Shopping

And as far as catalysts for further selling, I’ve highlighted how margin is unwinding in recent essays. This means leverage is coming out of the system, and debt is unwinding in the investment world.

A lot of that unwinding has now taken place which removes the forced selling. I believe many companies were facing a June 1 deadline from their broker to reduce their leverage, which contributed to the extreme levels of selling. Now that’s mostly done with.

Add to this, there are some bullish indications in the economy.

Current Fed Chair Jerome Powell indicated peak inflation may have happened in April. Former Fed Chair Janet Yellen said she believed peak inflation might have already happened in March.

There is currently talk of peak energy prices having already taken place, too. And Delta Air Lines just increased its forecasted sales and earnings to pre-COVID levels. Sony has cited it’s ramping up production of the PS5 based on supply chains easing.

So the labor market will resume strength and supply chains will get into a rhythm once more, which should ease inflation as well.

The BMI has a knack for nailing lows and highs. It helps us try to time the market and spot when stocks go on sale.

In moments like these, it’s a great time to go shopping. I am adding stocks in this oversold market – especially “outliers,” the stocks that beat all the rest. (To see yesterday’s buy alert, paid-up subscribers to Outlier Investor can go right here. And if any readers would like to learn more about joining, you can find that info here.)

I would advise readers to do the same, with the caveat that we shouldn’t expect massive gains in two weeks.

The prudent investor has a longer time horizon and is now identifying great opportunities for the long term. I am buying stocks with an eye towards 9, 18, and 36 months out – and beyond.

Ultimately, times like these, when many people wonder if they should sell, present great opportunities to buy. And the BMI concurs.

Talk soon,

Jason Bodner
Editor, Outlier Insights

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