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When Can We Expect This Overbought Market to Pull Back?

Popeye had super strength from eating spinach. Ironically, the concept was based on flawed data. In 1870, while researching nutritional benefits of spinach, chemist Erich von Wolf missed a decimal point for its iron content in his notes: 35mg instead of 3.5mg.

The devil’s in the details. But the thought of combing through a monstrous spreadsheet of thousands of numbers makes most people queasy. I find it soothing. There is a plain truth that resides in numbers. Listening to media or opinion just doesn’t get that same black-and-white answer. I dug for hours through my data to get and answer to a burning question.

When Will This Stock Market Crack?

I’m an eternal optimist and perennial bull. But ultimately, I’m a slave to my data: the analysis of my system for picking outlier stocks. At my research firm, we scan 5,500 stocks per day and then rank each one for its health (things like earnings, sales, and profits) and mechanics (things like new highs, lows, or how strongly a stock is trading). Once ranked, we overlay a special algorithm designed to identify when big money is moving in and out of stocks. It spits out buy and sell signals on stocks that are seeing big money inflows and outflows.

Determining when big money is buying the best stocks is how we pick stocks. We then take all buy and sell signals and plot them on a 25-day moving average to get the Big Money Index.


When the yellow line drops below green, the market is oversold, and we can expect a big near-term bounce. When it is above red, the market is overbought, and we can expect a near-term pullback. And that’s where we are now: the stock market is heavily overbought.

So, When Will It Crack?

My data goes back to Jan. 1, 1990 – 30 years, or 7,800 trading days. Each day has a Big Money Index reading. It’s been highly accurate for identifying market tops and bottoms for three decades. It is what allowed me to alert you in late January that a market top was near. It also allowed me to call a market bottom for March 20 (off by one trading day) and to bet on America and buy stocks in late March and early April. 

What does the data say is next for the market? I’ve done all the hard work and number crunching for you. We can know where we are going by looking back at where we’ve been.

What’s important to know is that the Big Money Index can stay overbought for a long time. It did for four months this year from May 6 until Sept. 2. The key is, when the Big Money Index peaks in overbought territory, that’s when we need to pay attention. It often drifts lower as big money buying disappears and selling increases. But the stock market indexes often continue to rise for some time thereafter. When the Big Money Index peaks, it is usually a good time to reduce risk, take profits, and save cash to go shopping when markets come under pressure.

So, let’s put this all together:

  • There have been 52 overbought periods of the BMI since Jan. 1, 1990.
  • The average length of each overbought period is 43 calendar days, or about six weeks.
  • The Big Money Index peaks an average of 19 days (just short of three weeks) after the market initially goes overbought.
  • The S&P 500 rose an average of 1.7% in that time.
  • This is interesting because the S&P 500 Index peaks an average of 46 days after the market initially goes overbought. That means stocks can rise another nearly four weeks after the Big Money Index peaks!
  • The S&P 500 rose an average of 4.3% from initial overbought to the S&P 500 peak. That’s when to be cautious and get ready for the inevitable pending drop.
  • Once that drop finally begins, get this: the market peak to trough takes an average of 91 days – that’s a little more than three months!
  • The S&P 500 fell an average of 8.9% during those peak-to-trough drops.

So, we can not only summarize what history has told us, but we can also try to forecast the precise dates and levels for the next overbought period. Let’s have a look:


Remember in the beginning when I mentioned that most people cringe when thinking about crunching numbers? Well, it’s a useful thing because it allows me to be pretty accurate when calling market tops and bottoms. I used this same technique when I called a market bottom for Friday, March 20, of this year. I was off by one trading day, and the S&P 500 bottomed on Monday, March 23.

So, I will boldly go ahead and make the following predictions based on my 30 years of data crunching the averages we discussed above:

  • The market went overbought on Dec. 2.
  • The market will remain overbought until Jan. 13, 2021.
  • The Big Money Index will peak on Monday, Dec. 21, 2020, at an S&P 500 level of 3,731.56.
  • The S&P 500 will peak on Jan. 18, 2021, at a level of 3,828.50.
  • The S&P 500 will then subsequently fall until Monday, April 19, when it will trough at 3,341.81.

Now, those are very precise figures, and all based on the averages of decades of data. Time will tell if I will prove to be right, but one thing is for sure – history suggests that a market peak is near. Either way, I’ll keep you informed with any changes I see in the data.

Big Money can show us the way forward. It can let us know when to keep our chips on the table and when to take them off. Data may have been boring in school, but now it is my secret weapon for navigating markets. 

Some see a sea of unrelated numbers … I see a market map. Earl Nightingale said: “All you need is the plan, the road map, and the courage to press on to your destination.” And I’ll be keeping a close eye on it.

The Bottom Line

We (MAPsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies. 

Disclosure: At the time of publication, the author holds no positions in the securities mentioned.


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