I can still remember sitting in that hot and stuffy classroom at the start of the college semester, listening to my finance professor talk about the intricacies of various stock market theories to describe how stock prices should move.
There are plenty of models that attempt to assign a value to stocks, like the discounted cash flow model, dividend discount model, capital asset pricing model … I could keep going. Each one promising to reveal the secrets of the stock market — as long as you did the right math and research.
Looking back, I now realize some of these models were based on pretty outlandish assumptions. But from my experiences, the most shocking assumption is that human behavior will follow some rational path in the stock market.
Human beings are NOT machines. We’re driven by natural instincts that can send asset prices swinging like a pendulum. Fear and greed, fight or flight … these basic emotions are the primary cause behind the market’s violent up-and-down moves. Shifting from one emotion to the other can radically alter the market’s course, which is why we’ve seen growth stocks plunge so far so fast in 2022.
It’s enough to make me wonder whether my college years may have been better served studying psychology!
Today I’m going to show you the pendulum on full display and what you can do to cash in on the market’s volatile emotional swings.
Decoding the Market’s Manic Emotions
The last two decades offer plenty of booms turned to busts that prove my point. Look at the dot-com bubble, the 2000’s housing and commodities markets, cryptocurrencies, meme stocks, nonfungible tokens…
And just like with those examples, the dogma around any single exchange-traded fund, stock or sector can also wear off just as quickly as it arrived.
The ARK Innovation ETF (NYSE: ARKK) is a prime example. The chart below shows ARKK against the S&P 500 since the start of 2020. At one point, ARKK was up 210% against the S&P 500’s 21% … a 10X difference! Then, it proceeded to hand back all those gains and then some, and is now down 14% against the S&P 500’s 19% return:
That’s why I’ve spent the better part of my professional career developing a system that reflects how the stock market actually works. It’s a system that actually accounts for the market’s erratic emotions (along with other key factors), and helps you land on the correct side of top stocks in the right sectors … or even cash in on stocks that are poised to sink as they fall out of favor. As you might imagine, this system has nothing to do with the theoretical pricing models I learned in college.
But it’s every bit as consistent as those models hope to be…
Wall Street Doesn’t Want You to Know (They’re Just the Same as You)
As perpetual boom and bust cycles show, the stock market is dynamic and there are countless variables evolving every day that impact stock prices. That’s why I rely on quantitative factors to guide me to the best opportunities.
Quant factors cover thousands of metrics, including a company’s stock price momentum, projected earnings growth and balance sheet health. Those factors are updated every day to account for even the slightest change in value. That allows for a consistent, repeatable approach that decodes the market’s emotions without making any dangerous assumptions about a stock’s value.
So as the pendulum swings toward — or away from — the best opportunities, my model automatically detects it. That’s how my Flashpoint Fortunes crew has consistently stayed ahead of the market, moving into stocks before the $2 trillion tsunami of Wall Street cash, and positioning defensively with puts before things start to turn south. This system is so consistent that it’s helped us win over 90% of our trades in 2022, during the worst first half the stock market has ever seen.
And we only expect things to ramp up as markets continue to unravel with no bottom in sight.
Research Analyst, The Bauman Letter