The current level of buying in stocks can be summed up in one word: breathtaking.
If you’ve been following the stock market, you probably know this already.
My neighbors are talking about stocks.
Random people that I meet want to chat about stocks.
And social media is ablaze with folks giving their own stock market commentary.
The situation got me thinking… How much momentum is in this market right now? There are so many new participants—folks jumping into the stock market for the first time. That information has to show up in the numbers, right?
So I went digging into the data over the weekend. And it showed what I expected: The buying in stocks has reached unprecedented levels.
As I’ll explain, the numbers show that stock buying has reached an extreme… which means a pullback is likely around the corner.
Stock buying jumps off the charts
Back in September, I made a simple prediction about the stock market’s future. I said we’d see sellers ahead of the election and buyers after. And that’s exactly what’s happened over the past few months.
But my prediction wasn’t perfect: I didn’t realize how big the rally would be!
So, back to my weekend study. It went like this. Since election day, there have been 55 trading days. I took the daily average of buys during that time and compared it to my historical dataset.
The green line is the 55-day moving average of buy signals collected by tracking the flow of Big Money in the stock market. Over the past few weeks, the average number of buy signals jumped above 140 per day. To get an idea of how extreme the current situation is… here’s what the data looks like over the past 15 years:
As you can see, the amount of buying has exploded over the past month. The green line broke out above any previous high from the past 15 years.
In other words, right now, stock buying is at an all-time high!
Now, let’s zoom in on this chart over the past five years:
This is momentum mania, folks! And it lines up with what I’m seeing in my everyday life: Everyone and their brother is talking about stocks.
So, when will stocks pull back?
Well, no one knows for sure. But we’ll likely see a pullback when that green line starts to drop. When that happens, it signals less buying. In other words, it means fewer traders will be clamoring to push stocks higher.
It will be painful for those that haven’t felt a pullback before. But we’re due for a decline. Seasoned investors know that this extreme level of buying can’t keep up forever. When the momentum fades, we’ll likely see a sharp decline. It’s a normal cycle for markets. They tend to swing from one extreme to the other.
So, what’s an investor to do?
First of all, don’t panic when the eventual pullback comes. Be ready. And have a game plan prepared ahead of time.
We’re in an environment where seemingly all stocks go up… even the bad ones. And that’s the important distinction about pullbacks. Great stocks—the ones that go up over the long-term—handle volatility better than “meme” stocks.
When the market tide goes out, investors flock to quality companies. And if you’re wondering how to spot quality stocks, last week I detailed my 3 pronged approach to finding awesome companies. It’s my recipe for finding the best long-term investments.
The bottom line is this: Stocks are extremely elevated right now.
In fact, we’ve never seen this magnitude of buying before. The unprepared investor will be caught off-guard when sellers eventually show up and the stock market pulls back.
If you want to win the “long game” of investing… you need to be prepared for the coming volatility.
Check your portfolio and make sure you’re holding the best stocks. When you own quality stocks, it’s much easier to handle the eventual pullbacks.
Over time, you learn to expect them.
I’m ready. Are you?
