Every couple of years, traders get extremely fearful…which offers up a rare “buy the dip” window. That’s the situation today as our Big Money Index (BMI) has reached the oversold zone, advises Lucas Downey, co-founder of MoneyFlows.
This indicator is a moving average, tracking equity inflows versus outflows. Only when sellers massively outnumber buyers can we reach the green zone. This chart shows the oversold conditions and prior instances of capitulation.
I’ve also analyzed forward returns for the S&P 500 Index (^SPX) and Nasdaq 100 from the first day the BMI triggers oversold. In short, six and 12 months later, major indices have a very high likelihood of double-digit returns.
Since 2014, the S&P 500 gained an average of 14.5% and the Nasdaq 100 climbed 17% post a dip into the green zone. Notable prior oversold periods include October 2023, the inflation wreck of 2022, and the Covid pandemic period in March 2020.
While market capitulations are painful to sit through, traders need to keep focused and not react emotionally. The better idea is to look for high-quality stocks offering a compelling entry point.
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