Little-Known Indicator Calling for a Turning Point in the Market

There is an old trading adage I’ve always liked: “The market will scare investors out or wear investors out.”

Prior to Aug. 20, we were in a wear-you-out stage. The Dow was trading in the narrowest range in more than 100 years of just 7.7% from top to bottom.

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To make things worse, the S&P 500 had crossed its 50-day moving average a total of 35 times, exceeding the number of crosses ever seen in a full calendar year in the first eight months alone. And the vacillating, whipsaw nature of the sideways trend aggravated investors.

Just prior to the violent sell-off, I wrote about how the massive pickup in new lows indicated a stealth correction occurring in stocks. At the time, about 60% of S&P 500 stocks were down at least 10% for the year — i.e., in official correction territory — yet the index was basically flat. 

Then, on Aug. 20, the market entered a scare-you-out stage. Traders embarked on a selling spree sparked by global growth fears that brought the index into full-blown correction territory in just four days.

The chart below shows the gargantuan spike in stocks making new 52-week lows as traders panicked and threw in the towel.

Wilshire 5000

The next graph shows how oversold the S&P 500 is using the Relative Strength Index (RSI) indicator. The number of S&P 500 stocks below 30 — the standard oversold level — went off the charts compared to every other sell-off in the past three years.

S&P 500

In other words, we are in extreme territory.

Nowhere is this more evident than Sentimentrader’s AIM sentiment model. This is a proprietary model created by the researchers and analysts at Sundial Capital Research that I track closely. It’s a very broad measure of stock market sentiment based on a wide variety of surveys.

Right now, market sentiment based on this indicator has hit a bearish extreme seen only 10 times in the past decade. And that is why I think we’re on the verge of a turning point in the market.

But probably not in the way that you’re thinking.

You see, market sentiment is a classic contrarian indicator that can help spot a change in financial trends. When too many people are thinking one way that’s usually when the market is primed to move in the opposite direction — sometimes violently.

When this indicator sinks to extreme lows, we almost always see the market turn higher or begin a bottoming process.

Because it is a proprietary indicator to Sentimentrader subscribers, I can’t show you the AIM model itself. Instead, I will show you every instance of an extreme reading — like the kind we’re seeing now — compared to the S&P 500.

S&P 500

The orange lines represent extreme readings over the past decade. All 10 show the market moving higher when sentiment gets this bearish. The one exception is in 2008, when sentiment hit extreme bearish levels but the market still moved lower. But I am monitoring conditions in the credit markets for signs of excessive stress like 2008 and, so far, we are not seeing that.

This doesn’t necessarily mean it’ll be smooth sailing from here. Notice the bottoming processes with extreme bearish sentiment in both 2010 and 2011. Those were highly volatile periods where we had multiple tests of the initial low. This is more of the same scare-you-out part of that old trading adage.

When it’s over, I expect the ensuing bottom to provide the chance for huge gains. Until the market turns, however, uncovering profit opportunities will be tricky to say the least.

In fact, at the moment, I only see one stock worth buying — a little-known industrial metals company.

As the market entered its scare-you-out phase and plummeted more than 10%, shares of this company fell a mere 6%. Since then, they have gone on to hit a new all-time high while many stocks are languishing near their 52-week lows.

In fact, over the past six months, this stock has outperformed 93% of all stocks in the market.

It has a stellar technical chart pattern and ultra-low valuations that scream, “Bargain!” I can’t tell you the name of the stock because I’m putting the finishing touches on this recommendation for my Alpha Trader subscribers. (If you’d like to be on the list of people who receive the recommendation as soon as it’s finished this week, you can sign up here.)

But I can tell you more about how I uncovered this stock in a market as volatile and dangerous as this one. It’s based on a system that takes the emotion out of buy and sell decisions — and has led to double- and triple-digit profits in a matter of weeks or months.

Following a system like mine could be critical at a time like this. The market has spent the year wearing investors out and then scaring them out. So, many of you will be too paralyzed with fear or too frustrated to act when the time comes to buy.

I’ve put together a presentation explaining how the system works and how you can begin following it today. Click here to access it.