Forced Buying That Starts a New Market Phase

In early April, Big Money sold hard. Capitulation was the name of the game. Headlines were scary.

But afterwards, there was a run of consecutive green days for stocks. What should we make of this action?

Uptrends Due To Forced Buying

The early April action was forced selling. It typically occurs at market troughs.

Thankfully, capitulation usually doesn’t last long. And once it’s done, we often see near-term uptrends due to forced buying that starts a new market phase:

Above are the four circular phases of money flows. Early April was Phase 4 – no buyers and record outflows. But notice that extreme selling often ignites huge buying in Phase 1.

These phase shifts are moments of opportunity. And frequently, being on the opposite side of the crowd pays off.

See, rare capitulation tees up some of the best buying you’ll ever get as an investor. And as MAPsignals data keeps getting more constructive, forced buying could lead the next leg higher.

When The Crowd Dumps Stocks, Take the Other Side

Investors need to see through today to focus on tomorrow. As corny as that sounds, when you study data, it’s true. Let me show you some examples.

The first is 10 years of capitulation events:

You probably notice those deep red lines. But be sure to also see the big green shoots that follow, along with the smaller, sustained green patches that accompany the big spikes. Using the exchange-traded fund SPDR S&P 500 ETF Trust (SPY) as a proxy, the market rise is evident.

The lesson is when the crowd dumps stocks, take the other side.

Now let’s look at March 2020, right when the pandemic took full force. Relentless selling eventually vanished, paving the way for forced buying:

Notice the quiet period when capitulation stopped in late March. As outflows met inflows, there was a slight pause before the monster green wave of buying.

This repeatable pattern also happened in late 2018. It wasn’t as bad as the pandemic, but the pattern emerged nonetheless – capitulation, full stop, forced buying:

This pattern is happening now.

Early April capitulation hit and now we’re witnessing light flows:

Soon the forced buying could take hold, which didn’t seem possible a few weeks ago.

And I have more concrete evidence that’s encouraging.

When considering days with 600 or more Big Money outflow signals, stocks of all sizes flourish months later (iShares Core S&P Mid-Cap ETF (IJH) represents mid-cap stocks, iShares Core S&P Small-Cap ETF (IJR) represents small-cap stocks):

In short, stocks rise after meltdowns…eventually. After capitulation, market lulls can be an entry point.

Understand Today’s Data

Buying indices is good. Buying outlier stocks is great.

Capitulation precedes longer runs upwards that are fueled by forced buying. That’s what history shows and we’re seeing the same pattern now.

And this is where the MAPsignals process shines.

If you’re a serious investor, Registered Investment Advisor (RIA), or a money manager looking for hedge-fund quality research, get started with a MAP PRO subscription today.