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By Jason Bodner, editor, Palm Beach Trader

Just as I predicted, August was a bumpy, unpredictable ride.

The S&P 500 closed the month down 1.8%. All the other major indexes ended the month in the red, too.

The markets jittered on major geopolitical events: a potential no-deal Brexit… the Hong Kong protests… Argentina’s stock market crash… and escalating U.S.-China trade war tensions.

Even Mother Nature got in the act. Hurricane Dorian tore through the Bahamas and threatened the U.S. Atlantic Seaboard. (The Category 5 storm’s eye came dangerously close to my home in Palm Beach County, Florida—within 50 miles.)

We’ve bid farewell to this volatile August. But what’s in store for September?

Well, after doing a deep-dive, I’m sharing what the data is showing today—and more importantly, what it means for your portfolio…

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The Good and the Bad

Selling finally slowed heading into the Labor Day holiday weekend. Now, the good news is, the market rallied a bit.

But the bad news is, this rally came off low volume. So this bounce could be a false sign. And I believe we’ll experience more discomfort this month.

Here’s why…

Regular readers know I’ve created a proprietary system that scans nearly 5,500 stocks every day to look for the best ones that the smart money is piling into. It also looks at the ratio of buying to selling in the market.

When the ratio is above 80%, the market is overbought—and likely gearing up for a pullback. And when it’s under 25%, the market’s oversold, signaling a potential rally ahead.

Right now, the ratio is below 45%, which is a sign of caution…

This dip below the 45% level usually means selling is near an end. But volatility may continue, and it could drop the ratio into oversold territory (the green area on the chart).

Yet this isn’t something to worry about. When the ratio has dropped into oversold territory in the past, a rally has followed (see the red lines above).

So although we might feel a bit more pain ahead, the market will rebound…

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Look at the Big Picture

Look, the data is indisputable: Over the last century, the market has continued to climb higher…

Of course, there’ll be bumps along the way. We saw them in August—and expect to see them in September, too. The market doesn’t go up in a straight line.

But in the long term, the current bout of selling is just a blip on the radar. The market will trudge ahead again. As I’ve said before, U.S. markets are an oasis in a sea of uncertainty, and they’ll continue to attract capital.

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With all the geopolitical turmoil, investors will have no choice but to put their money in quality U.S. stocks. Plus, U.S. equities continue to look more attractive than other securities, including “safe-haven” bonds.

For instance, the S&P 500’s dividend yield is right around 1.92%, while the benchmark 10-year Treasury’s yield is 1.47%. But each is taxed differently.

Dividends are taxed at 23.8% (the maximum long-term capital gains rate). And bond income is taxed at the 40.8% maximum federal rate for ordinary income. So your after-tax return on stocks is about 67% more than on bonds.

So don’t worry. We’ll see investors flock back into U.S. markets soon. In the meantime, we need to prepare for continued short-term selling…

Get your dry powder ready. We’ll be looking for the best companies the big money is showing interest in.

We’ll pounce when these names go on sale. And buying quality stocks at a discount and holding them for the long term is the best way to make money in the markets.

By Nick Rokke, analyst, The Palm Beach Daily

Sometimes you just get a feeling—and right now, I’m nervous about the stock market this month.

The stock rally we’ve been experiencing since December 24, 2018 has been the fiercest and most persistent one I can remember. On Christmas Eve, the S&P 500 bottomed at 2,316. Since then, it’s gone on a straight line up to around 2,810—a 21% gain.

Anyone who’s tried shorting the market over the past two months has been obliterated. And stock investors are feeling pretty good right now—like the market can go up forever.

But conventional wisdom says that the market has moved too much too fast. So does this mean the bears are ready to roar soon?

I reached out to our Wall Street insider, Jason Bodner, to get an answer on that. But before I get to his insights, let me tell you what’s making me nervous…

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Signs of Rare Strength

One way to measure the market’s strength is to see how many times it closes above its 10-day moving average (MA). Currently, the S&P 500 has closed above its 10-day MA for 40 consecutive days.

How rare is that?

The last time it did so was in 2010—when the S&P closed above its 10-day MA for 42 straight days from February to April. You’d have to go back 13 more years to find another streak like that… In the spring of 1997, the S&P had 35 straight closes above its 10-day MA.

And to find another sustained rally, you’d need to go back even further—all the way to 1972.

But the last two times the market peaked—in 2011 and 1997—it proceeded to fall 19% and 9%, respectively.

Historically speaking, a pullback is imminent; nothing goes straight up forever. But the market’s momentum isn’t the only thing that has me worried…

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Investors Are Overly Bullish

Every week, the American Association of Individual Investors (AAII) releases a survey of investor sentiment. It asks investors whether they’re bullish, bearish, or neutral about the market over the next six months.

The survey can be a good contrarian indicator… When investors are overly bullish, they’re likely already invested. That means there’s little money left to go into the market. So the market often reverses at these extremes.

If you compare the number of bullish investors versus bearish ones, you can gauge the mood of the market. As you can see in the chart below, investors are very optimistic right now:

The last time there were this many more bulls than bears was October 5, 2018. And that marked the start of the market’s 19% fall last quarter.

So are we headed for another pullback? I got in touch with Jason to find out…

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The Wall Street Insider’s Take

Regular readers know Jason is the editor of Palm Beach Trader. After spending almost two decades on Wall Street, he created a proprietary system that scans nearly 5,500 stocks every day to look for those that institutions are likely buying.

Jason’s system also looks at the ratio between buyers and sellers in the market. And it’s been very accurate and timely. In fact, he called for a bounce in December 2018, which came right on time.

If anyone has their finger on the pulse of the market, it’s Jason. So I told him about my concerns. Here’s his response…

Well, logic dictates that we’ve gone up too far too fast—and that we should correct soon. I’ve been hearing some iteration of this daily for weeks now as well. But I don’t think it’s time to worry yet.

My system has seen 538 unusual institutional buy signals and only 48 sell signals for the week ending March 1. So buying is still going full force. This means we can stay overbought for a while to come.

My ratio will start falling only when we see some buying abate and some selling pick up—which hasn’t happened at all yet. In fact, there’s still an overwhelming amount of buying. And it’s happening in small- and mid-cap growth-oriented names.

And there’s another good sign: The market has weathered a great deal of negative news lately—which also indicates strength. More from Jason…

We’re definitely overbought. Everyone can pretty much conclude that the market’s due for a pullback. But my data suggests buying is still alive and well under the surface.

The North Korea summit collapse and Michael Cohen’s testimony had more than a few people checked out last week as they focused on the juicy news stories. And when negative headlines can’t bring a market down, it means there’s a stable ballast of buying underneath. That’s what we’re seeing now.

The trend says buying is alive and thriving. So we need to pay attention to when the buying slows and selling begins to properly call a turn in the market. We’re just not there yet. We may be there tomorrow, next week, or even next month. But for now, we should ride the tide.

Now, Jason’s system has proven accurate over the years when it comes to pinpointing market tops and bottoms. For instance, his system predicted the top in February 2018 and the bottom in December 2018.

So although the market is red-hot right now, a pullback doesn’t look imminent—at least not yet. Based on Jason’s data, it could come within days or maybe not for a while.

How to Position Yourself

Despite the signs that the market is getting overheated, Jason’s data reminds us that uptrends can last longer than expected.

If you want to take advantage of the continued momentum, consider adding some exposure to small- and mid-cap growth companies.

One way to do that is with the SPDR S&P MidCap 400 ETF (MDY). As long as it stays above $347.50, upward momentum is intact.

These companies will likely get a higher bounce from continued buying. However, they’re also very volatile, so position-size wisely.

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As I mentioned above, Jason’s proprietary system scans nearly 5,500 stocks every day. And at least 10 days before Wall Street files market-moving documents with the Securities and Exchange Commission… his private, $250,000 database flags when big money is flowing into certain trades.

His system has shown historical gains of up to 352% in six months. And you can use the same “cheat sheet” to predict which stocks are about to skyrocket—several days or weeks in advance.

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Editor’s Note: Last year was the worst for U.S. stocks in a decade. So what does 2019 have in store? That’s why I called Wall Street insider and Palm Beach Trader editor Jason Bodner.

Jason spent nearly two decades as a top trader for prestigious Wall Street firms such as Cantor Fitzgerald. He also created a proprietary system that scans nearly 5,500 stocks every day to track institutional buying.

Today, Jason tells me why he remains bullish on U.S. equities despite all the recent volatility—and which sector he thinks will catch a bid in 2019…

Editor: Jason, 2018 was the worst year for the stock market since the 2008 financial crisis. In fact, this past December was the worst since the Great Depression.

In a moment, I want to get your favorite way to play the current volatility. But first, what’s your prediction for 2019?

Jason: I’ve never been one for making bold, crazy predictions. But I feel confident we’ll see a good year in stocks. However, it won’t be a good year for all stocks.

I think we’re going to see more of a stock picker’s market.

As I told you before, I believe we’re heading into a more selective bull market.

In this phase, you have to know what you’re doing. You have to pick strong companies and know how to separate the wheat from the chaff.

In a selective bull market, we’ll see rallies in individual stocks. Companies with superior fundamentals, earnings, and sales growth will reveal themselves when the market is less bullish.

Overall market gains will be less aggressive, but equities as a whole will go higher.

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Editor: There’s plenty of potential bad news out there for 2019, though: trade war fears, political uncertainty, and rising interest rates…

None of it worries you?

Jason: There’s always something to worry about. And the media is very good at letting you know what the negative stories are.

But where else are you going to put your money?

Let’s think this through…

Bonds still have historically low yields. And after taxes, they’re yielding less than the S&P 500. So why not buy stocks, get a better yield, and then get the potential upside from the equity?

And foreign economies are a disaster…

Look at the United Kingdom. People are scared there. Last month, Prime Minister Theresa May postponed the Brexit vote because of strong opposition. If she loses the vote this month, she could be ousted. So there’s a lot of political uncertainty there.

Germany and Italy are already in recessions. And those are really the only investable economies in Europe. In fact, the Stoxx Europe 600—which tracks 600 stocks in 17 European countries—plummeted 13% last year.

And China has its own host of problems. It really can’t afford a trade war. That’ll devastate its economy. On top of that, the country has mountains of debt. It’s a precarious situation there.

Latin America is looking rough, too. Energy prices alone are hampering its economies. And emerging stocks are doing even worse than Europe. The MSCI Emerging Markets Index is down 16%.

U.S. equities are really the only places to put large sums of money to work.

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Editor: So you’re saying the U.S. is the best of the worst?

Jason: The U.S. isn’t really that bad. I think people are worried over nothing.

Some people are concerned about rising interest rates. Well, rates are still historically low. And not only are they historically low, but markets are starting to price in little likelihood of a rate rise in 2019.

Others are worried about the yield curve inverting—when short-term interest rates go higher than long-term rates.

So far, it’s just the 3-year rate going higher than the 5-year rate. That has had no predictive power at all. Plus, even after the yield curve inverts, bull markets typically last another year and a half.

Other people are worried about tariffs and trade wars. But I just don’t think it’s going to be that big of a story for the U.S. in 2019.

The U.S. economy is strong. Unemployment is low, consumer confidence is high, wages are growing, and profits and sales are still increasing.

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Editor: I’ve heard people say that kind of optimistic talk reminds them of 2007. We had a strong economy then, but the market crashed soon after.

Jason: The 2007 parallel is grasping at straws. It’s not a realistic comparison.

In 2007, you had crazy debt leverage in the U.S. People were packaging products like mortgage-backed securities knowing there was a high likelihood of default. The subprime mortgages were just waiting to go down in flames.

The rate of corporate earnings and sales growth were lower in 2007 compared to now, too. And tax rates were higher back then.

Everyone could see a catalyst for the market going down in 2007.

No one is talking about the biggest financial institutions having exposure to limitless debt or how we should bail them out. We have no catalyst like that now.

Now, I do want to add a caveat…

Just because I don’t see a catalyst for a market crash doesn’t mean human emotion can’t go off the rails. The market can go lower just because people are scared. I can’t say for sure that people won’t throw the baby out with the bathwater.

Editor: You’re right… It’s hard to control for human emotion. So how do you gauge market sentiment?

Jason: Honestly, the only indicator I follow is my proprietary unusual institutional investing system.

It doesn’t specifically have any investor sentiment gauges built into it. But it does track what large institutions are doing. And I’ve seen studies showing institutions control over 70% of the buying and selling in the market.

If you can follow what 70% of the market is doing, you pretty much know what the sentiment of the market is.

You can also say that technical analysis—the study of price action—shows sentiment as well. Things like moving averages, the relative strength index, and the average directional index have an impact on market participants.

I track those things because other people track them… It impacts their buying and selling decisions.

While I don’t specifically look at any metric out there, it’s built into my system and what I look at in the market.

So even though it’s only one thing, it’s the most robust indicator I’ve seen… That’s why I built it. I wanted something more robust than a single data point or two that a lot of investors look at.

As far as I know, there’s nothing else out there like it…

Editor: I agree. I’ve researched probably thousands of indicators. None of them have as many inputs as yours.

Since you’re looking at all these stocks every day… what stocks do you think will have the best 2019?

Jason: Like I said earlier, it’s going to be a stock picker’s market. So we have to be selective. I think we’ll see a return to quality companies.

One group I think will do well as a whole will be dividend growth stocks. I think they’re going to catch a bid this year.

As a whole, the S&P 500 is yielding about the same or more as the 10-year Treasury, after taxes. But dividends are taxed at a lower rate than interest payments. So I think yield-starved investors will go to these stocks for income.

That’s where I’m looking to put money to work in 2019.

Editor: Thanks for taking the time to chat today. Take care.

Jason: As always, my pleasure.

Editor’s Note: The stock market is having its worst year in a decade. As recently as September, the market hit its all-time high. But over the past three months, it’s pulled back 10%—its worst showing since the 2008 financial crisis.

That’s why I called our Wall Street insider Jason Bodner, editor of Palm Beach Trader. Regular readers know Jason spent 12 years as a trader at famed investment bank Cantor Fitzgerald. He also created a proprietary system that scans nearly 5,500 stocks every day to track institutional buying.

In today’s interview, Jason tells me where he thinks the market is headed next—and what the big money is doing right now…

Editor: The past three months have been very volatile. One week, the market is up 5%… Then, it’s down 5% the next. So what’s going on?

Jason: The media gives us lots of reasons for this volatility: Interest rates are going up… The yield curve is inverting… Earnings growth is slowing next year… There are trade war fears…

The list goes on. And maybe they matter. Maybe not.

Here’s the important thing… What we’re seeing now is a massive sector rotation in the stock market. As investors fear risk in growth sectors, they pull out and head for safety in higher-yielding stocks.

Over the past month, we’ve seen money flee from growth sectors like tech and energy and head to safe-havens like real estate investment trusts [REITs] and utilities.

This transition has been ugly and volatile.

I’ve also noticed a change in market character. Over the past couple of years, everything rose—good and bad stocks alike. We had that massive “Trump Bump” after the 2016 presidential election… and the president’s tax cuts boosted the entire market.

Now, we’re seeing unpredictable daily volatility and a market that’s struggling to find its footing. But when it does find its footing—and I believe it’ll happen soon—we should see a more divergent market…

Good companies will go up, and bad companies will go down. It’ll become more of a stock picker’s market.

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Editor: Can you tell readers what you mean by a “stock picker’s market”?

Jason: Well, when a bull market is in full throttle, it’s much easier to make money on stocks. Odds are, whatever you pick will go up if the whole market is trending higher.

But when the bull calms down, investors must become more selective. They have to pick companies with attributes that can sustain price appreciation.

In a more selective bull market—a phase I believe we’re heading into—you have to know what you’re doing. You have to pick strong companies and know how to separate the wheat from the chaff.

This type of market will be great for institutional investors—like hedge funds, etc.—that do deep-dive analysis into companies. This kind of research should pay off in a big way. And by extension, that should be great for my Palm Beach Trader portfolio.

I designed my proprietary system to pick up unusual institutional [UI] activity. It often flags great companies as big funds start buying them.

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Editor: Do you have any examples?

Jason: For sure.

On September 11, my system flagged UI activity in Starbucks at a price of $54.97 per share. Then, on October 9, we found out that famed hedge fund manager Bill Ackman bought nearly $1 billion worth of shares in the company. That’s a sizable material stake for a company with a market cap of $82 billion.

And the four-week lag between the signal and Ackman’s announcement makes sense, as it takes weeks to build a position of that size—nearly 17 million shares.

A couple of weeks later, Starbucks crushed its earnings report and soared higher. It peaked over 25% since my system flagged it back in September.

Editor: That’s a huge move for a big company like Starbucks…

But what I really love is finding smaller companies that few people know about. That’s where we can find outsized gains. Has your system flagged any small caps?

Jason: Sure, there have been plenty.

One that stands out happened back in January of this year. My system flagged a small biotech company called Bioverativ. We noticed unusually large buying in the company. And four days later, pharma giant Sanofi announced it was buying Bioverativ—for a 60% premium.

Now, it’s not surprising to see UI buying in takeover stocks. Quite often, when word of these deals leaks, you’ll see weird volume in the equity and options markets.

I didn’t specifically design my system to find buyouts like these… But it’s a happy consequence of having a great system.

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Editor: That’s awesome. If we could always find stocks like that, it wouldn’t matter what the overall market does…

On that note, are you still bullish?

Jason: Yes. And here’s why…

We’re just experiencing a little pause in a bull market right now. It feels like a huge drawdown, but if you were to look at a chart of the S&P 500 from the bottom of the bear market in 2009 to now, this pullback would barely register as a blip in that chart.

It’s very minor in the grand scheme of the market. And my data says we’re going higher.

Part of my system looks at nearly 5,500 stocks every day. It then takes all the ones with UI buying and divides them by the stocks with UI selling to create a ratio.

In my experience, we only see UI selling for a short time. The sellers exhaust themselves, and buyers typically come in and move the price up.

The ratio indicates that sellers have just about exhausted themselves. The underlying market data is showing that—on a single-stock level—things are starting to firm up.

On this last bounce, we started seeing signs of institutional buying. So the big money is slowly moving back into the market.

Editor: Where’s it headed?

Jason: As I mentioned, we’re likely seeing institutional buying in REITs and utilities.

That’s where most of the activity is right now. But when the market does firm up, I’ll be watching where the money moves in preparation of the next leg up.

Editor: Great. Thanks for sharing where the big money is going right now. Take care.

Jason: As always, my pleasure.