OK, so the headline is a little strong.
100% of the time – over the past 90 years – stocks have been higher after going through what they just went through.
Can you name another indicator that has called the market correctly – 100% of the time – over the past 90 years?
So while I can’t predict the future, looking at the past provides a clear picture after situations like what we just went through in the markets…
First, I’ll show you the track record. Then I’ll explain it.
What we just went through was pretty extreme…
The market had its worst week in more than a year – after hitting a 52-week high.
My friend Jason Goepfert of SentimenTrader.com looked back at every time this had happened before in history.
He was looking for one specific condition: the worst week in a year, occurring immediately one week after a 52-week high.
As you might guess, this hasn’t happened a lot – only 10 times, to be exact (not counting this latest occurrence).
Jason is conservative in his “play calling.” So it was interesting to read his enthusiasm after these results. Here’s what he said…
All 10 signals led to a rebound over one to six months, and the risk versus reward was ridiculously skewed to the upside.
There was almost no downside risk on a closing basis, while the rebounds tended to be very strong.
This is one of the most skewed risk/reward ratios we’ve seen in any study in recent years.
I can’t be 100% certain that stocks will be higher six months from today. But based on Jason’s homework, history paints a pretty compelling picture. (I highly recommend you check out Jason’s excellent work at SentimenTrader.com.)
Sure, it would be great if we had more than just 10 occurrences over the past 90 years to hang our hats on. But this indicator is 10 for 10 so far. And as Jason said, the reward versus risk was “ridiculously skewed to the upside.”
Today is more of a “buy” than a “sell” based on indicators like this. Follow your trailing stops, of course. But don’t get spooked out of the market. I believe there’s still plenty of upside ahead…
Source: Daily Wealth