Every stock market sell-off has a silver lining…
Periods of heightened fear may paralyze investors in the short term − but they never last forever. And they always create the conditions for major outperformance.
That doesn’t mean we can predict the future. We can never know exactly when prices will reverse. But we can look to history to build a framework for what we expect the market to do next. And that’s helpful to us today…
You see, the Dow Jones Industrial Average recently hit a rare oversold setup. This signal tells us that, like a rubber band stretched too far, prices are ready to snap back higher.
It’s a powerful setup for outsized gains. And according to history, it means we could see a 17% rally over the next year.
The Dow’s Sell-Off Points to 17% Gains This Year
Too far, too fast… That’s the classic recipe for a reversal.
It could be a stock that has soared well above healthy levels… or an asset that has crashed too quickly.
Either way, when prices move too far, too fast, a reversal is likely. And that’s the setup we have right now with the Dow.
This major index fell in recent weeks as fear spread throughout the markets. But the selling hit an extreme level according to the relative strength index (“RSI”)…
The RSI uses recent price action to see whether a rally or decline is overdone. An RSI below 30 indicates oversold conditions… which means an asset is ready for a snapback rally. The Dow recently dropped to an RSI of about 25. Take a look…
Stocks started falling in late February, when the conflict in Iran and the subsequent energy crisis began. And in late March, the Dow’s RSI fell to the lowest levels since last year’s tariff crash.
This is a powerful sign of future outperformance. To see it, I looked at each unique setup when the Dow’s RSI dropped to 26 or lower since 2010. Here’s how stocks performed in the following months…
The years since the financial crisis have been incredible for investors. The Dow has grown at nearly 10% annually since 2010… even though it’s less exposed to the tech sector’s massive upside than other major indexes.
Still, you can do much better if you buy the Dow after an oversold extreme like we saw recently. Those setups led to gains of 8.3% in three months, 11% in six months, and 17.4% in a year.
That’s massive outperformance. Plus, the Dow was higher a year later in every case. So if you’re patient, the odds of losing money are darn low.
In short, these periods of pain aren’t fun. But they set the stage for big returns. The Dow has already begun rallying this month. And history says we can expect more upside to come.
Good investing,
Brett Eversole
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Source: Daily Wealth
