Buy the Freakin' Dip!

For a full transcript of this video, see below.

Hey, everyone. I'm Andrew Zatlin.

Welcome to Moneyball Economics. And if you're like me and you gorged on Thanksgiving — well, guess what? I don't think we’re done feasting!

I think this week we're going to have a major, major stock market rally. And I'd like to talk to you about why I think you should buy the dip.

Last week, on Monday, I told you to get ready. I said there was going to be a selloff. And sure enough, wow, did we have a selloff. And it was actually a good thing.

So let's revisit the premise:

Why do I think you should buy the dip?

Because I think the market is over-sold, and I think we're due for the usual December “Santa Rally.”

So let me explain why I think the market is over-sold.

And the reason takes us back in time…

If you remember, back in October, we had a massive run-up. It was too high, too fast. So some amount of consolidation was overdue.

I also pointed out last week that we had a November “seasonality effect” underway, where the pension funds had to take all this money and park it somewhere. And they were not going to park it in equities.

Then third, we talked about the “technicals.” The technicals were telling us exactly what those pension funds were doing and gave us the tip to back off. So let's talk about each one of these…

Why do I say the market went up too high, too fast?

For one, the S&P 500 went up 7% in October. That's 84% growth annualized. That's not just unsustainable, but it shows that there was too much “buy-in,” which meant there was nothing left to come into the market, to come to the table and buy again in October and November.

So even worse, not only it was money not coming in during November, it was actually actively flooding out. And here's why…

The second reason: the seasonality!

Remember, November is when pension funds get a lot of money that they've got to invest. It's when companies are topping off their annual funding. The problem this year was that equities had shot up, and yields had shot up on bonds (which meant bond prices were down).

So the combination of super strong equities and super weak bonds meant that in their portfolios, equities were overweighted. In dollar terms, they just got too big.

And when that happens, it creates the stage for a forced rebalancing, which means the forced selling of equities. So in November, pension funds were in a position of selling equities, not buying — quite the difference in October.

So again, the market shot up in October. And you come into November and pension funds are primed to sell, and they were selling. How do we know they were selling? Because we can see it in the technicals.

Last week I was introducing you to some of the ways that I look at technicals by looking at three specific ones: the Bollinger Bands, the Mac D, and the RSI.

Again, don't worry what they are. When you're ready, we can go into a deeper dive. Just know that when these three technicals are in line, it's a sign that the big pocket money — the deep pocket money — has left the table. And that means no new money is coming.

In fact, there's selling going on in the background.

And don't expect prices to go up, expect them to go down. If you want to know what to do, well, that's a whole other matter. But in this case, let's take a look at what we we’re seeing.

Coming into October, you can see this massive surge. You see where that arrow is? That is the surge in the S&P 500 going on — more critically, it's hitting the top of the Bollinger Band.

So that should have been a yellow flag telling us, “Wait a second, this thing's white hot, this market's white hot. Should we sell?”

And that's when we start looking at the Mac D and the RSI.

And you'll see that if we look at these blue arrows, you'll see that there was no sell-off in October.

Because again, while you had the stock market bumping up into the top of the Bollinger Band, the Mac D and the RSI are still going up. That means, even though we're pushing the upper edge of prices in the stock market, money is flowing in and the RSI is still expanding…

Money is still coming in. Investors are pushing up prices.

Now compare that to earlier in the year (September) where you had, again, something very similar:

You had the market bumping up and hitting the ceiling of the Bollinger Band.

But in this case, the trend in the RSI and Mac D is negative.

So you've got the prices in the stock market getting very hot. And at the same time, the RSI and Mac D indicating money's leaving the table.

In other words, it doesn't take much for that bubble to get popped because there's no money buffering it.

Again, if you look at the more recent blue arrows, you'll see, even though it's hitting the upper channel of the Bollinger Band, money is still flowing into the market. In fact, that's what's pushing it up.

But we see at the tail end of those arrows, as we head into November, you see that they're flattening. You see that they're starting to stall.

That means no new money is coming in. And at the same time, you see that the pricing is still high. It's still towards the top of the Bollinger Band. In other words, you're starting to see that sell-off take place.

So that's what we started to see from mid-November, the valuation of the stock market isn't really bumping up anymore. It's still at the upper part of the Bollinger Band.

Only now, money is flowing out of the market until where you can see the RSI and the Mac D are starting to trend down.

And at the same time, you have that Bollinger Band hitting the upper part.

So you’ve got that pattern that we saw earlier, just two months ago, back in September — that pattern of moving up, and the excitement going down.

And that means a sell-off.

And man, did we have a sell-off!

The stage was set, right? We got too high, too fast.

Positions were taken and pension funds needed to sell. We were just waiting for a catalyst. And that catalyst came and it was Delta Omicron.

What happened?

Well, not only did things get soft, but they plunged.

And I want you to really focus on this blue arrow. It hit (and actually overshot) the bottom arc of the Bollinger Band. This is a classic indication of “oversold.” And we've seen it before.

In fact (while there's no arrow), if you go back and you look at when we were going into September, you'll notice the last time that the market overshot to the downside, it held there for a couple of days, and then it started to move up.

And again, that's what you would see in the market with the Mac D and the RSI: those two trending up and the Bollinger Band at the very bottom. That combination is what we're about to see.

So what do we do here? Well, this week, all attention will be focused on payroll. That's right — it's payroll week. And I am one of the top payroll guys. So here’s what's happening on Friday…

We're still going to get a great number below the general consensus here, but look at that number: 500,000 — half a million bodies.

We still need to get to about another 3 million before we can consider ourselves back to pre-COVID levels.

So we are still far away from a “normal economy.”

And even though I'm saying “softer,” does that even matter?

At the end of the day, what's the difference between 500, 550, or 488? After all, they’re all still signs of an economy that's healing growing and doing quite well.

But here's the gotcha. The market might say “Well, if it comes into the downside, if Zatlin is right, then ‘the Fed’ might be more prone to pushing out their taper.”

This is again where macro-economics collides with the stock market…

Go back a bit: we just had bad news hit the market after everything was primed for sell-off. And it happened. And it happened gloriously. It happened immediately, like ripping a Band-Aid off.

Now we come in, and everyone is really nervous about the Fed and what the Fed is going to do.

At the same time that equities fell, you knew people were selling-off and buying bonds because bond yields dropped 20 basis points. To give you an idea, 20 basis points is ridiculous. (For reference, a basis point is one-hundredth of a percentage point. For example, 1%, that's actually 100 basis points.)

So to go down 100 basis points is to go down 1%.

20 basis points is going from 1% down 0.8% on a yield. That's huge. It's massive. It doesn't happen unless you've got some kind of panic selling of stock and panic buying bought.

So we now have oversold the market. We've overbought the bond market, and now it needs to flip-flop.

Why do I think it's going to reverse? Well again, because I think it's oversold like the technicals tell us. It may not immediately reverse, but it may if we see softness in the payrolls.

Again, the Fed's not going to be as driven to hit the brake by slowing down the taper.

What does that mean? It means bond rates will come down a little bit, remain soft, and the stock market will go buy back into it.

Take the softness and payrolls and add in COVID concerns.

Because again, COVID is an economic concern.

It doesn't matter what I think about COVID Omicron. It doesn't matter what you think. What matters is if governments will get around the table and say, “Ooh, we’ve got to hit the brakes again.”

That means slower taper. The stock market will like that because that's liquid.

The bottom line: I think there's a head fake. I think with respect to COVID Omicron, nobody's going to buy into this anymore. After almost two years of COVID, people are done, they're just flat out done.

And we've seen how they can bypass a lot of the issues and keep the economy going.

Consumers can still shop. They’ve figured out different and alternative ways to enjoy themselves. And I just don't think people are really going to accept another shutdown. It's just not going to happen.

Politicians in an election year will get driven out if they are held accountable to any kind of economic impact.

The bottom line: Friday is a big day.

Going into Friday, I would suggest you get ready to take a big position, because we just had that ripping off of the Band-Aid, that big sell off. And now it's time to get back because we've got one month until the end of the year, and people want to show profit.

This is Zatlin out.

I hope you had a wonderful Thanksgiving, and I look forward to connecting with you soon.

In it to win it,

Moneyball Economics