By Chris Igou, analyst, True Wealth
Investors are scared.
I get it. Heck, we’ve seen two 10% falls in the U.S. market just this year.
But if there’s one thing you should take away from all the uncertainty lately, it’s this: When investors are spooked like they are today, it means U.S. stocks have plenty of upside from here.
Importantly, we can see this today in one sector you might not expect. And it could lead to huge gains as the Melt Up takes off. Let me explain…
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By now, you likely know the details of my colleague Steve Sjuggerud’s “Melt Up” thesis. We’ve written about it a lot recently in DailyWealth. It’s the last major rally at the end of a bull market, before the big “Melt Down.”
You see, investors get greedy when a bull market nears its peak. They let their guard down and go “all-in” on the promise of much higher returns. Your family and friends will only want to talk about how well they are doing in stocks.
Simply put, we aren’t there yet. Investors aren’t going all-in today.
In fact, we can see this in a sector that soared hundreds of percent in the late 1990s – during the last Melt Up…
Health care stocks rallied for nearly an entire decade in the 1990s. But the sector didn’t really take off until the second half of the decade.
As the dot-com boom picked up steam in the second half of the ’90s, investors began to go all-in. And health care stocks soared 250% in less than five years. Take a look…
The health care sector soared during the last Melt Up. Today, I believe we are facing a similar opportunity.
The Melt Up in U.S. stocks is still ahead of us. And investors haven’t gone all-in on health care. It’s the exact opposite… Investors want nothing to do with the sector.
We can see this sentiment through the bullish percent index (BPI). The BPI tracks the percentage of stocks in a sector that are trading in a bullish pattern. It ranges from zero to 100.
The BPI flashes a bullish signal when it drops to 30 or lower (oversold territory) and then turns higher. And it flashes a bearish signal when it reaches 80 or higher (overbought territory) and then turns lower.
As you can see below, the health care sector BPI recently fell below 20. And at the end of last month, it turned higher, giving us a bullish signal…
The chart shows investors losing confidence in October. The BPI hit more than a two-year low.
This negative sentiment combined with a major market Melt Up could be a huge tailwind for health care stocks. And hundreds of percent gains are possible as a result.
Now, we can’t know for sure if the recent market drop is over just yet. So even with this bullish signal, I can’t recommend buying in until the uptrend is confirmed. But when health care stocks enter a new uptrend, the sector will likely outperform as the Melt Up takes off.
Remember, today’s sentiment is another sign that you haven’t missed the Melt Up in U.S. stocks. And health care stocks could be a big winner as stocks move higher.