Ready to profit from a market rally?
August and September were extremely challenging for stock market bulls.
Higher interest rates pressured growth stocks, taking the wind out of many of Wall Street’s favorite tech plays. At the same time, inflation concerns weighed on consumers (and many retail stocks). The possibility of recession also can’t be ruled out, leaving investors feeling uncomfortable with too much exposure.
Yet, despite all of these challenges, the broad U.S. stock market now looks like a good bet!
In fact, I’m increasing the amount of bullish exposure in my Speculative Trading Program in anticipation of a fourth quarter stock market rally.
Here are three reasons I expect us to have a tradeable rebound over the next few weeks.
Reason #1: Oversold Readings
After a brutal season of falling stock prices, the broad market has become oversold. Many investors have thrown in the towel, reduced (or eliminated) exposure to stocks, and are now on the sidelines.
On one hand, the market can stay oversold for long periods of time.
But typically when the selling has run its course, markets tend to stage very abrupt (and very lucrative) rebounds.
This often happens because so much cash is on the sidelines. Fearful investors then see the broad market start to rebound and worry that they’re missing out.
In situations like this, the higher the market trades, the more incentive there is for sidelined traders to jump back in. At least until markets become overbought — which can reverse the cycle.
For now, the oversold nature of this market creates a “dry powder” situation where any good news could spark a bullish explosion higher.
Reason #2: Underlying Support
Take a look at the chart of the S&P 500 below. Notice how the market has pulled back to its 200-day moving average (the blue line), which also corresponds to the price level where the market broke out in May of this year.
There isn’t anything magical about these support lines. But often human psychology comes into play at important levels like this.
For example, traders who missed the original breakout from earlier this summer were frustrated to see the broad market continue higher. Many promised themselves that if they had the chance to buy at those prices again, they would pull the trigger.
Now the market is back to the level where traders originally missed the breakout. A successful test of this level will naturally create an emotional incentive for both retail and professional traders to put more capital to work.
Reason #3: Seasonal Strength
Historically, September has been the worst month of the year. On average since WWII, investors have lost money during the month of September.
On the other hand, the final three months of the year have historically given investors the best returns. Wall Street historians also know that bear markets and corrections tend to bottom in October leading to gains heading into the end of the year.
Of course there are no guarantees in the world of investing. And markets could continue to respond negatively to higher interest rates and a laundry list of risks in play.
But given the oversold and bearish tone to the market right now, there’s a high probability that we’ve reached a short-term peak in pessimism — and a short-term bottom for the broad market.
Make sure you’re prepared to profit from a stock market rebound!
If you’d like to see the most aggressive plays I’m setting up in my own account, make sure you check out the Speculative Trading Program.
Members receive real-time email and optional text alerts each time I enter (or exit) a trade. And I make sure that you’ve got a chance to enter the trade before I place my own order. That way you get first shot at the opportunity before I pull the trigger in my own account.
Here’s to growing and protecting your wealth!