At the end of April, before meaningful progress on a trade deal with China and before the market had fully reversed its early-year losses, I suggested to readers that they treat the market sell-off as a buying opportunity.
I reached that conclusion based on five signals that suggested a contrarian opportunity to step in and buy. Today, I’d like to share those signals, why they supported buying, as well as the sectors that are most likely to thrive going forward.
5 Signals That Had Me “Buying Weakness”
1) The Smart Money Was Buying
The Smart Money Flow Index, published by WallStreetCourier.com, compares market activity during the last hour of trading each day to activity at the open. The idea is that trading in the first several minutes of the day is “dumb money,” and the “smart money” steps in at the end of the day. This indicator normally tracks the market by rising as the market rises, points out James Paulsen, of Paulsen Perspectives on Substack. This indicator was up, but the market was down, creating a bullish divergence.
2) Voters Are Not Happy
Public opinion polls increasingly showed (and still do) voters are unhappy with the economic policies of President Donald Trump. These negative polls signaled that Trump would give up his hard line on tariffs, which created so much confusion and uncertainty among domestic business leaders and investors. Polls immediately prior to President Trump’s trade progress with China showed record-low economic approval, that only 39% of voters supported his handling of trade and tariff issues, and that both consumer and CEO confidence levels were very low.
All of this suggested Trump was under pressure to bend, or face midterm losses for his party.
3) The Insider Buy/Sell Ratio Was Bullish
Insiders were cautious for several quarters ahead of the correction. But in the weeks leading up to the rebound, they turned bullish, judging by buy/sell ratios, said Argus Insider Weekly.
4) The Investor Intelligence Bull/Bear Ratio Was Bullish
This is my good go-to sentiment indicator because it is so accurate. Historically, at one or below, the market is a buy. It was recently .73. This was a rare low level, normally only seen during a crisis like the GFC or during a bear market, as in October 2022.
5) The Market Has Very Low Inflation Expectations
The market is one of the best economic forecasters. Right now, inflation-sensitive sectors are lagging (energy, materials, industrials and real estate). Commodity prices are also weak (oil, copper, aluminum, steel, lead). This means the stock market and commodity markets forecast minimal inflation, noted Paulsen. The implication here is that Fed Chair Jerome Powell will have a lot of room to cut rates if need be. The Fed put can be deployed.
The important takeaway, for investors, is that monitoring indicators such as these, especially during times of maximum panic, can provide meaningful signals in the midst of a lot of headline noise.
So, where should we be invested moving forward?
Tech, materials, consumer discretionary, industrials and financials do the best during the six months coming out of a correction. You want to buy stocks in these sectors on days when the market is down.
In tech, both Nvidia (NVDA) and Advanced Micro Devices (AMD) look attractive as AI plays. But I’d favor Advanced Micro Devices since it will likely be taking share from Nvidia. I’ll also single out Marvell Technology (MRVL) and Broadcom (AVGO) as AI plays. They are helping Microsoft (MSFT), Alphabet (GOOGL) and Amazon (AMZN) develop custom chips that these hyperscalers hope will differentiate their product offerings.
