If you want to be a successful investor, you must understand how to take the market's temperature…
That is, you need a way to size up whether the market is healthy or not. If you can't do that, then good luck knowing what moves to make in your portfolio.
Yesterday, I explained an easy way to do it: Look at how many stocks are going up versus how many are going down.
This simple idea is the best Melt Down indicator there is. It signaled to get out before the peaks in 2000 and 2007. And today, it's giving the “all clear” on the market.
Knowing this, it's worth figuring out the best place to put money to work. And it turns out, another signal that's flashing right now can help us do just that… one with a perfect track record.
Let me explain…
You can size up the number of rising stocks in a lot of ways. And we're not the only ones looking at indicators like this…
Our friend Jason Goepfert at SentimenTrader recently shared a similar indicator with his readers. It has a perfect track record in technology stocks over the short term. So it's a fantastic way to gauge when it's time to buy into this sector.
Fortunately, he has been kind enough to let us share this particular signal with you. Here are the two conditions that cause it to trigger…
- More than 60% of stocks on the Nasdaq must be up over the last 10 days on average.
- More than 65% of trading volume must flow into rising stocks, on average, in each of the past 10 days. That means folks are pouring money into the stocks with momentum.
So most stocks must be rising, with most of the volume flowing into the winners. That's a lot of positive trading activity flowing into stocks. And importantly, we're seeing both ingredients in the market today.
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These two conditions have come together just 19 times since 1975. It's incredibly rare. And every case led to higher prices in the Nasdaq over the next month. Take a look…
That's right… 100% of the time, the Nasdaq rallied the month after this indicator started flashing.
This indicator has a 45-year history of leading to gains in tech. And while the one-month time frame has a perfect record, the performance during the next two months also tends to be darn impressive…
This signal has an 89% win rate over two months. Only two occasions led to losses over that period… And those two losses were each less than a 2% fall. Meanwhile, the biggest winner over the two-month period was 16.6%. That's a fantastic risk-to-reward ratio.
In short, the likelihood of a Melt Down in the coming months is low… while the likelihood of big gains in tech stocks is high.
The simplest way to position yourself for those gains is to buy the Technology Select Sector SPDR Fund (XLK). This fund tracks the tech sector. So it's a straightforward way to bet on a tech rally.
The market is healthy today… And tech stocks in particular are primed for a solid move higher. Investing in XLK is an easy way to take advantage of it.
Good investing,
Chris Igou
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