What the "Secret Indicator" Tells You to Do Now

Last month I shared a "secret indicator" with you that's so powerful I called it "The Secret About Market Timing I Wish Everyone Knew." And I wasn't kidding.

That's because the tool I highlighted is the only one I've seen in more than 30 years of analyzing financial data that has worked consistently enough to have caught every single major market turning point.

I bring this up because that's exactly where many investors believe we are right now - a turning point.

Seems a lot of people are convinced that this week's trading action is a harbinger of the end of the financial universe as we know it. Others are less convinced but still shaken by falling oil prices, Russian troubles, and the potential for an unceremonious Greek "exit" from the Eurozone that could make Lehman Brothers look like a cakewalk.

Either way, they've had their hand firmly on the sell button.

secret indicatorBut should they?

That's what we want to talk about today.

Believe it or not, you may have an ideal entry point on your hands.

Here's what you need to know.

What we're going to discuss today is NOT a timing exercise, even though many people like to think that way.

Long-time readers know that I am not a fan. Market timing has always been a losing proposition and, chances are, always will be.

Admittedly, I always get challenged on that by people who simply don't want to believe it. So don't take my word for it. Instead, look to independent sources like DALBAR, which show that the average investor trying to time the markets achieved a mere 1.9% a year over the last 20 years. Or, review studies like those from Nobel Laureate William Sharpe, who once calculated that a person trying to time the markets would have to be right 82% of the time just to match "buy and hold."

Understanding sentiment is something altogether different.

You may think I'm splitting hairs here, and I get where you're coming from if that's the case. But there's a nuance.

My take is that the market is a huge collective construct that embodies the wants, desires, and aspirations of millions of participants. As such, it more accurately reflects emotion than any other bias.

It stands to reason, therefore, that if you can understand what kind of mood it's in, you can optimize the investment choices you make, the tactics you use, and how you manage risk. All are core Total Wealth principles.

So let me tell you how to do it...

My favorite tool for understanding the market's mood is something called the Put/Call Ratio.

As I illustrated in this column late last year, readings above two standard deviations favor buying or more buying, while lower readings between -1 and -2 standard deviations favor selling or protective action at a minimum.

Here's the chart from www.IndexIndicators.com I used to make my point at the time. As you can see, there's a simple inverse relationship between fear and greed that plays out in options activity.

secret indicator

It's the equivalent of a poker "tell" - meaning that you can gain an advantage based on changes in trading patterns or the psychological balance inherent in trading activity.

Simply put, excessive bearishness is an inverse argument for a bullish reversal. Conversely, excessive bullishness is an inverse argument for a bearish reversal.

What's interesting about this is that there's no speculation involved. In contrast to other sentiment indicators, the Put/Call Ratio is measuring the difference between thousands of put and call options that have already been traded.

At the time of writing (Monday evening), the Put/Call Ratio looks like this:

market timing

After dropping from a 2-standard deviation high in December, it's begun a subtle rise again. That tells me the bulls are beginning to wade in and that the sell-off we're experiencing is losing momentum.

However, given the reading's relative location on the chart at only 1 standard deviation, I'm inclined to believe that we have a few more days of selling ahead, at which point the Put/Call Ratio may again top out at or near the 2 standard deviations that have represented optimal buying points since 2012.

So what do you do now?

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If you're a trader and you are nimble with good risk management discipline, buying something like Direxion Large Cap Bull 3X Shares ETF (NYSE Arca: SPXL) makes sense given the short time frame we're talking about. At the money call options would be another great choice with super short-term potential.

Don't jump in all at once though. Instead, try buying a little time to "scale in" like the professionals do - meaning you buy more as the trade begins to move your way. That way you're not exposing yourself to undue risk if there's more selling ahead.

If you're an investor, now's the time to begin looking for companies that have been beaten down based on nothing more than short-term market momentum. You'll know you've found one when you see that the market action has no bearing on the underlying business case whatsoever.

One of my favorites right now is Raytheon Co. (NYSE: RTN).

The company recently won a $491 million AMRAAM (Advanced Medium-Range Air-to-Air Missile) contract that includes producing the missile system, munitions, programming equipment, and other instrumentation for sale here and to Korea, Oman, Singapore, and Thailand. European nations are rumored to be considering multibillion orders on other weapons platforms, too. It's active in just about every defense sector around the world at a time when defense spending is (sadly) on the rise.

Or consider an energy company like Williams Companies Inc. (NYSE: WMB), which has a price target consensus of $62.33 and an implied upside potential of 44% from where it closed Monday at $48.43. It's off by 27% from a 52-week high of $59.44 set last August.

If that bothers you, consider that not a single oil company I know of has expressed worries that it won't sell every last drop of black gold it owns. The temporary price drop that's causing many to go apoplectic just isn't the ruinous calamity "everybody" thinks.

Editor's Note: Knowing when to get into these stocks is great for investors... but there's one stock Keith insists you get in NOW. It doubled within six months of his recommending it to Total Wealth readers, and he sees even more explosive growth ahead. For a full report on the company and its stock ticker, click here - it's free!

About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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