Folks are worried coronavirus will trigger a stock drop…

And on Monday, it sure seemed like they were right.

As the headlines about the deadly coronavirus outbreak in China reached a fever pitch… stocks around the world plunged.

At one point, the Dow was down more than 500 points.

Through the lens of the nightly news, the outbreak may seem like a world-ending plague. But as I (Chris) showed you, it’s unlikely to affect stock prices much.

That doesn’t mean it’ll be a straight shot higher for stocks.

As you’ll see today, mom-and-pop investors are in a buying frenzy. And that’s a contrarian signal of trouble ahead. So, before you buy another stock, take some time to read today’s issue.

If we’re right… you have better buying opportunities ahead.

It’s all in a chart colleague Jason Bodner passed along…

As regular readers know, Jason was one of the few guys on Wall Street authorized to make $1 billion trades.

Now, he heads up our Palm Beach Trader advisory.

And although he’s a long-term bull on the U.S. stock market, he’s warning his readers that a short-term pullback in U.S. stocks is imminent.

It’s all in this chart…

It’s of the Russell 2000 small-cap index. It’s a great barometer of where the rest of the stock market is headed.

You see, small-cap stocks are riskier than the large-cap stocks in the S&P 500. That’s because they’re stocks in newer, less well-established companies with a higher risk of failing.

So when investors get nervous, small-cap stocks are the first ones they throw overboard.

Think of small caps as the canary in the coal mine for the rest of the stock market.

The green lines on Jason’s chart pinpoint the last four times Jason’s system flashed a warning of a short-term pullback.

And as you can see, each of the three times before the current warning… a drop of between 3% and 10% followed for small caps.

Jason’s system doesn’t track news stories…

And he’s not sitting around thinking about the epidemiological spread of viruses… or what Brexit means for European stocks… or what the chances of Trump’s reelection are…

…or any of the other “important” news in the mass media…

As the old-timers on Wall Street say, “Markets don’t make the news. The news makes the markets.”

But folks in the mainstream press are always trying to craft a narrative around market moves. “X” news event, they tell you, caused “Y” market move.

But it’s just not that simple.

Something happens in the world… and stocks drop… and people link them together.

But correlation, as they say, isn’t causation. It’s just two things happening at the same time.

So the latest news is not something Jason… and other Wall Street guys… pay much attention to. Instead, they tend to focus more on what does drive stock moves – investor sentiment.

That’s what those green lines on Jason’s chart are all about…

They correspond to peaks in buying of exchange-traded funds (ETFs).

ETFs trade like stocks on a regular exchange. But instead of giving you exposure to just one company, they typically track an index of stocks. Think the Dow, the S&P 500, or the Nasdaq.

When the ratio of ETF buying versus ETF selling is at extreme highs, it signals to Jason that a pullback is coming. Here he is with more on that…

ETF buying is a good contrarian indicator. Mom-and-pop investors use them to get exposure to stocks. So when ETF buying is at bullish extremes, buying has likely peaked.

This happens when the stock market is soaring… and the talking heads on CNBC are popping the champagne corks. So this is the time most rookie investors pile in.

But I don’t bother with the financial news much. I’ve spent too much time as a trader on Wall Street to know it’s just not that relevant. To me, peak ETF buying signals it’s time to do the opposite of what the crowd is doing. That’s when I want to keep my powder dry. It tells me stocks are overbought… and better buying opportunities lie ahead.

You can see it all in the next chart…

It’s of the ETF buy-to-sell ratio Jason tracks. He uses it to get a read on where investor sentiment is at.

When the ratio is more than 80% (red line above), buyers are in control and stocks are overbought.

When it dips below 25% (green line), sellers have taken the reins.

During the 15 similar setups over the past 10 years, the average sell-offs following overbought extremes lasted about just over three weeks. The average loss for the small-cap index was 5.5%.

And each time after these dips, the stock market has gone on to make new highs…

Next time someone tells you “X” event caused “Y” stock move, it’s best to ignore them…

It’s important to think strategically… and try to get the big picture right.

We spill a lot of ink at the Cut on what we think is coming down the pike.

But it would be crazy to imagine you can distill stock market moves into a single cause. You’d have to know what’s motivating millions of buyers and sellers of stocks. And that’s impossible.

That’s why Jason focuses on investor sentiment. It gives him a key insight into how to act.

It’s all summed up in the following advice from superstar investor Warren Buffett: You want to be fearful when others are greedy… and greedy only when others are fearful.

And right now, Jason’s research shows that the crowd is at a greedy extreme.

To be clear, Jason is NOT expecting a catastrophic plunge in stock prices…

Jason is one of the most bullish analysts here at Legacy.

And he continues to believe the stock market is the single best place to grow your money over the long term.

You just don’t want to get greedy… right as that’s what the crowd is doing. Jason…

This pullback will be temporary. History tells us it’ll take a few days or weeks to dissipate. So right now, let’s wait out this healthy correction and have our shopping lists ready.

When my system turns green again, we’ll be able to enter this epic bull run at even lower prices. Many great companies will go on sale and hand us buying opportunities. And we’ll be ready to scoop them up at a discount.

I will update you in these pages when Jason’s system sounds the all-clear. If he’s right, that will signal a great time to buy stocks, because there’ll be lots of bargains on offer.

So stay tuned for more on that…



Chris Lowe
January 29, 2020
Delray Beach, Florida

P.S. Something legendary commodities investor Rick Rule said about falling stock prices always sticks with me. Rick is an old friend of Bill Bonner. And he’s made hundreds of millions of dollars for himself and for his clients by being a contrarian in the resource sector. This is reflected in Rick’s motto, “You’re either a contrarian… or you’re a victim.”

Rick was speaking at an investing conference I was also speaking at. After his talk, we discussed some of the unhelpful ideas rookie investors have. Rick said when the typical investor goes into the store and sees a nice bottle of wine at half off, he buys. If it’s good wine, he might even buy more than one bottle.

But the same guy checks the stock market… and sees stock prices are down… and his first instinct is to sell. But as Rick said, this doesn’t make sense. Lower prices are great news if you’re still accumulating stocks.

Remember, it’s a mathematical certainty that – as long as the company doesn’t go broke – the lower the price you buy a stock at, the higher your return will be. The higher the price you pay, the lower your return will be.

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