Wait Just a Minute Before You Push That “Buy” Button…

I know how you feel. No, seriously… I KNOW HOW YOU FEEL.

Like 90% of investors, you’ve watched the market shoot higher after the last two days, and you’re probably thinking that you need to move every penny from your money market into stocks before you get left behind for good. We call it FOMO.

Don’t do it.

I’m a numbers guy, and the numbers tell me that we’re going to see a little cooling of the markets before the next 5% move. Let’s look at the Small Cap Russell 2000 Index ETF (IWM). Here’s the numbers…

The Russell 2000 Index ETF shot higher by more than 6% in the last two days. That’s only happened 38 times since 2000.  That amounts to 0.7% of the trading days, which makes it a rare event.

Here’s a quick summary of what happened in the market after those 38 “signals.”

  • On average, the IWM turned in flat performances in the ten days following similar rallies.
  • The best performance was in March 2020, after the initial pandemic crash.
  • The worst performance was in November 2008, emerging from the housing bubble crash.
  • There is a stronger bias to the negative return bias. This makes sense as “traders” are more likely to take the opportunity to “sell into short-term strength.”

Here’s Why the Data Matters: Data like this helps to identify the market’s reaction to unique events. Having only happened 38 times in 23 years, the last two days clearly qualify as unique. The market tends to replicate these reactions.

Bottom Line: I’m expecting to see the IWM and other major indices pull back and make a short-term consolidation that will offer the opportunity to step into the short-term bullish trend that should favor the markets through the first few weeks of the year.  I recommend that you think about doing the same.

About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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