The Real Force Behind Big Market Moves – DailyWealth

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With a little work, you can enjoy incredible investment returns.

Yes, you… the “little guy”… the “average investor.”

A lot of folks don’t realize this, as I explained yesterday. It’s easy to get duped into believing only the smartest and most connected folks can succeed. But it’s simply not true.

If you want to do it, you only need to understand one thing… the “DNA test” of the market.

It’s simple. Anyone who is willing to put in a little effort can take advantage of it. You just have to think about what drives the stock market… at the most basic level.

At a glance, the market is hugely complicated. It’s a fortress of moving parts. And it takes in hundreds, even thousands, of data points each day to determine prices.

That’s all true. And I realize it’s a bit daunting. But there’s a deeper truth to the market that has a massive effect on what it does.

Let me explain…

Remember, the buying and selling activities of real humans are at the core of market action. These folks try to weigh the evidence themselves. And they make bets based on what they expect to happen next.

When it comes down to it, folks make trades for two main reasons: greed, or fear. They either buy because they expect prices to move higher… or they sell because they expect prices to fall further.

This happens every day. And it’s where the DNA test comes in. We want to see whether the market is running on greed or fear… Or, in other words, we want to see what the market is made of.

If folks are all buying in unison, the market is showing extreme greed. This tells us most investors are already in on the trade.

Hugely positive sentiment like this is a troubling sign for the market. Think of it this way… If investors are all betting stocks will go up from here, there’s no one left to buy more. There’s no one left to push prices higher.

When investors are “all in,” that’s when a rally is likely running out of steam.

Conversely, if investors are all jumping into their bunkers, that fear is a sign of the exact opposite. It shows that investors are expecting more losses… And it means there’s no one else to sell and push prices lower.

On an individual level, this information doesn’t tell us much. But when a mass group of investors bet in the same direction, it’s a sign that the market is about to take a turn.

Gauging this overall sentiment is how we test the DNA of the market. By understanding what the masses are doing, we can get a grasp of what’s likely to come next. It tells us if stocks are healthy… or if a crash is imminent.

Consider what happened back in March. We saw the scale tilt into “extreme fear” mode based on the CBOE Volatility Index (“VIX”).

The VIX is the market’s “fear gauge.” It measures the implied volatility of the options market. But more simply, it tells us if folks are scared or not.

When stock prices swing wildly, the VIX rises. And that usually means fear is increasing.

When the VIX peaked on March 16, 2020, it was a sign of maximum fear. Just a week later, the S&P 500’s month-long fall came to a halt. It stopped falling and started soaring.

The S&P 500 hasn’t looked back since. Take a look at the chart below…

This is the market’s DNA test in action…

By examining what investors do at extreme moments, we’re able to peek at the DNA that’s driving prices.

Even more, these moments of extreme fear are indicators that a buying opportunity has arrived. And you don’t have to peg the exact peak in fear to make money, either.

In fact, even as fear subsides, you can still make big money in the following months…

Since 1990, you could have outperformed the market significantly by buying after the VIX spiked above and fell back below 35.

Similar cases have led to nearly 12% returns a year later. Meanwhile, the S&P 500’s typical one-year return over that same time frame was 7%.

Now, the VIX isn’t the only way to test the DNA of the market. Anything that measures broad market sentiment can be useful. This is just one simple way to do it. And obviously, following the VIX is darn useful.

Again, the VIX peaked in March. And stocks started to rally shortly after.

That’s why I’ve told my readers to get back into U.S. stocks since the beginning of May. And today, with a strong trend in place, it’s still the right move.

But the bigger point today is, understanding the DNA test for the market is what will give you a leg up on the investing competition. It’s how the “little guy” can enjoy fantastic returns. And I urge you to put it to work in your own investing starting now.

Good investing,

Steve

Further Reading

“You can make money as the ‘little guy’ on Wall Street,” Steve writes. Lots of everyday investors think that putting their money into the market is a waste of time. But that just isn’t true… If you missed the first part of Steve’s essay, be sure to catch up on it right here: Don’t Get Fooled Into This Amateur Belief.

“Despite everything going on today, positive signs are piling up in the U.S. market,” Chris Igou says. After the extreme ups and downs in stocks earlier this year, it might be hard to believe. But right now, we’re seeing signals that U.S. stocks have plenty of upside potential over the coming year… Read more here: What to Make of the Market’s Best Quarter in a Decade.

Market Notes

ESSENTIAL WORKERS STILL NEED UNIFORMS TODAY

Today, we’re checking in on a strong, “boring” business…

Regular DailyWealth readers know businesses that don’t change over the years can make great investments. These companies may not be exciting to most investors, but their steady growth usually translates into higher share prices, even when times are hard. Today’s company is no different…

Cintas (CTAS) is a $35 billion uniform and cleaning-services provider. Workers wear its uniforms in more than 1 million businesses across the manufacturing, construction, and hospitality industries, among others. Despite the pandemic, Cintas reported that revenue grew 2.8% in its 2020 fiscal year, which ended in May. And in the fourth quarter, both revenue and earnings beat estimates, despite what CEO Scott Farmer called a “significant disruption” to its business.

As you can see in today’s chart, CTAS shares have soared in recent months. The stock has more than doubled since its March lows, and shares recently hit a fresh, all-time high. As long as businesses still need uniforms for their workers, this boring stock should continue higher…

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