Prepare for Election Chaos By Michael Salvatore, Editor, TradeSmith Daily In This Digest: The Big Money Index didn’t stay overbought long… Prepare for election chaos… But get ready to buy for a gangbuster end-of-year… Why the bitcoin breakout (and $100,000) is inevitable… Well, that was quick… Remember how last week, we warned you about Jason Bodner’s Big Money Index (BMI) going overbought? Remember how we showed you that it can sometimes stay overbought for quite a long time, and not to rush out of stocks? Well, turns out this was not one of those times. Take a look – the BMI (yellow line) is already back below the overbought mark at 80%:
Regular readers know the BMI is a measure of overbought and oversold conditions that uniquely looks at unusually large buying volumes – the kind that tend to come from deep-pocketed Wall Street institutions. Jason Bodner’s experience as a dealmaker for Cantor Fitzgerald taught him how to spot these order flows. When the BMI goes up, it’s a sign that the Big Money is buying into the market, and vice versa. This can happen regardless of where the market moves, as you can see. The red and green lines mark overbought and oversold levels. When the BMI crosses into one of these levels and then exits, it can act as a broad-based sell and buy signal, respectively. That brings us to today, with the BMI exiting overbought conditions after just a few days. The last few times we saw a brief overbought signal over the last few years, stocks indeed sold off in the weeks to follow. Look to August 2022, February 2023 and July 2023 for the evidence. Note also that the BMI continued falling for weeks after this event, with the index reaching the green oversold line twice. I went back and looked at the average 42-day performance of stocks after these three short-lived overbought signals, and the results are mixed: For the August ’22 signal, stocks fell just over 10% in the 42 trading days after the BMI exited overbought. Mind you, this was near the capitulation bottom of a bear market – very different from what we have today. In February ’23, stocks actually rose about 2.5%. This, to us, seems more like a consolidation move. Big Money continued buying through this period, just not as much as it was selling. And the July ’23 signal saw stocks fall a much milder 4% in the two months after a BMI. Context is important here, too – stocks had yet to crack new highs. If you ask me, this suggests we’re in for a bit of a rough patch in markets… at least for the next couple weeks. And I probably don’t need to tell you why… The U.S. election is almost here… Every U.S. election brings a tremendous deal of uncertainty, which only accelerates in the final days leading up to it. We’re in those final days. And they’re already proving to be among 2024’s most volatile. Regular readers have been well prepared for this, as we’ve been sharing our data about election year seasonality for the past several months. But let’s pretend this is your first TradeSmith Daily and catch you up to speed. Below is a chart of how the CBOE Volatility Index (VIX), aka the market’s “fear gauge,” historically moves during election years. We’re currently in a window between mid-September and November which tends to see the VIX rise about 40%, indicating a serious turn in investor sentiment. While we haven’t seen that play out quite the same way this year, volatility is on the rise:
And in the past eight election years, the next five trading days (the week before the election) have seen the VIX rise about 10% on average. The historical trend in volatility is higher. That has typically correlated with lower stock prices, though not always. The VIX is simply a measure of how many S&P 500 put options traders are buying. That means it’s not necessarily a bearish stance… just a cautious one. Regardless, you don’t need me to tell you the market is taking heat. Stocks are down 1% from last Friday’s close, as I write. Considering the seasonality picture, it may prove prudent to take a defensive stance until after the election is completely decided. I don’t use “completely” by accident. After what happened last cycle and in previous elections that felt similar, like the 2000 contest between George W. Bush and Al Gore, there’s a strong chance that we won’t know who the president will be potentially for weeks after election day. On top of that, there’s a Federal Reserve interest-rate decision the day after Election Day. That’s a rare convergence of uncertainty that could manifest as investors going full risk-off in just a few days. Are our analysts saying to go risk-off and cash out of stocks? No. But you’ll need to be ready to make “chaos trades” if you want to profit during this time. So, we do want to invite you to attend The Day After Summit hosted by Louis Navellier of InvestorPlace and Charles Sizemore of The Freeport Society, where they’ll share their investing strategy for this moment in history. Go here to learn more and RSVP. All told, it’s set to be a crazy time in the markets. But as we discussed earlier this week, that time won’t last forever. Be sure to use it as a buying opportunity in quality stocks. If you’ve been investing a long time, you know these final two months of the year are very good ones for the market. That’s just as much the case during election years, as you see in this seasonality chart of the S&P 500:
Over the last 18 election cycles, stocks put in a gangbuster performance from right about now through year-end. Any short-term volatility over the next couple weeks would be a screaming buy against this backdrop. I’m also very bullish bitcoin right now… Recently I showed you how bitcoin was set to break out from its mild 2024 downtrend. Here’s a look at the progress of that breakout…
Once we see that breakout through $68,000, it’s about a 7% move from there to all-time highs. Pierce that, and the sky’s the limit. But we can use data to give us an even bigger edge. I went back and looked at the three past “halving” cycles – where the bitcoin supply rate drops in half – to see how bitcoin performs in the following holiday season. In each of those three years, bitcoin was up by the end of the year. After the first halving in 2012, it was up over 508% in the 2013 holiday season (as the first halving happened in December 2012). After the second in 2016, it rose over 49%. And in the third halving cycle in 2020, it rose over 128%. If bitcoin does not close the year up from today’s prices, it would be a major break of tradition. It would also mean it completely sits out the traditional year-end asset rally – something I just don’t see as likely. Also, take a look at this… Bitcoin has outperformed gold year-to-date, but the inverse is happening since the halving:
As we’ve been showing you these past few weeks, the smart money is preparing for another wave of inflation hitting in 2025 and beyond. We have clues on that both in surging bond yields and the prices of gold and silver. Bitcoin is gold’s much younger, digital cousin. It was invented, in part, as a hedge against the inflationary monetary system that prevails throughout the world. Its narrative as an inflation hedge is gradually becoming more accepted over time. And its dominance this year shows that investors are looking toward bitcoin as market leader rather than the laggard it was during the 2021 altcoin mania.
I implore you – if you don’t own any bitcoin, it’s never been easier to do. Buy the genuine article or buy an ETF, it doesn’t really matter. This thing is going to be a big story in 2025, and the prices we see today may prove to be the best we’ll see for quite a long time. To your health and wealth, Michael Salvatore
Editor, TradeSmith Daily | 