Today, I’m going to start with some advice…
Buy stocks now.
That may seem crazy.
After all, interest rates are spiking. The economy is rolling over.
And World War III could start any day.
All those factors have kept the stock market in a tortuous decline since late July.
The S&P 500 peaked near 4600. It closed Friday near 4120. That’s a 10% decline in three months.
So lots of folks think it’s dangerous to buy stocks here.
Maybe they’re right.
Then again, maybe they’re not.
Lots of folks were happily buying stocks at the highs three months ago. They were chasing prices higher into overbought conditions – afraid of missing out on a continuing bull market rally.
They were being cheered on by the financial television talking heads that saw every dip as a chance to “buy, buy, buy.”
And now, with the broad stock market trading 10% lower, most folks are too scared to buy.
I can’t tell you with 100% certainty that the stock market will be higher two months from now. Nobody can guarantee that outcome.
But what I am certain of is this: Buying stocks today is a whole lot better than buying them three months ago.
Rather than chasing stocks higher into overbought conditions, we can now buy stocks in oversold territory. And instead of buying stocks ahead of the seasonally weak months of September and October, we can buy going into the typically bullish months of November and December.
And, rather than buying while everyone else is rushing to do so, we can now buy when everyone else is trying to sell.
Yes, that can be hard to do. It’s not easy to go against the herd.
But it is usually profitable.
Let me show you…
Start with this chart of the Bullish Percent Index for the S&P 500 (BPSPX)…
A bullish percent index measures the percentage of stocks in a sector or an index trading with positive technical patterns.
It’s a percentage. So, it can only drop as low as zero or rally as high as 100.
Most sectors are overbought when the bullish percent index rallies above 80. Most sectors are oversold when the index dips below 20.
But when it comes to broad-based indexes – like the S&P 500 – which hold stocks in multiple sectors, the parameters are a little tighter.
For example, the S&P 500 is overbought when the bullish percent index climbs above 70. It’s oversold when the BPSPX dips below 30. It’s quite rare for the BPSPX to extend outside of that range.
Over the past three years, the BPSPX hit 80 just three times. It dipped below 25 also just three times.
Here is how the S&P 500 behaved following each of those extremely oversold conditions (blue arrows)…
In each case, the stock market rallied over the next several weeks.
Of course, that doesn’t guarantee we’ll see the same results this time. But conditions are oversold, and we’re entering a seasonally bullish time of the year.
So, as I wrote earlier, buying stocks today is a whole lot better than buying them three months ago.
Best regards and good trading,
Jeff Clark
Source: Jeff Clark Trader