Calling a market top is a game for fools and overconfident pundits with no skin in the game. Right now, with the Dow Jones Industrial Average trading around 200 points off its all-time highs, crash calls and bearish sentiment are increasing by the day.
Make no mistake; the market top will print eventually. There are many signals indicating that the top is in or at the very least close.
Smart stock investors will keep an eye to the signs when deciding how to position their portfolios going forward. Even though we don’t know how long the market will keep pushing higher, utilizing bearish signals as a data point when making decisions is simply intelligent investing.
One of the more widely used sentiment signals has been flashing a top alert for the last several months. This article will explore the indicator, delve into what is happening right now, and provide stocks that have set up to be great shorts.
The bearish indicator is money flow. As capital (money) flows in and out of the stock market, prices fluctuate. While this is common sense and doesn’t mean much on a day-to-day basis, over the longer term trends in money flow can be incredibly prescient.
Today, money flow is the most bearish that it has been in over a decade. Over the last ten weeks, over $30 billion has been removed from the stock market, per a study by Merrill Lynch . Also, the smart money is positioning itself in a defensive posture to weather the expected downturn. The combination of smart money positioning with the outflows paints a very bearish picture for the rest of 2017.
How To Calculate Money Flow
Money flow, though it may appear complicated to figure, is quite simple. The calculation involves averaging the high, low and closing prices and multiplying this number by the daily volume. In and of itself, this single number is meaningless. It needs to be compared to the previous day to determine a positive or negative money flow. These differences can then be plotted on a chart to determine cash flow trends over time.
An indicator known as the Money Flow Index, or MFI, is a standard technical tool installed on many online broker platforms. MFI is traditionally used as a divergence indicator, meaning both exceptionally high and very low readings are read as bearish. This is because high readings point toward the stock being overbought thus ripe for a decline, while low readings mean the stock is oversold.
That said, doing the opposite of traditional teachings and wisdom is often the way to proceed when it comes to technical indicators. My experience shows that stocks with an MFI below 20 tend to continue moving lower as money continues to flow out despite the low reading. At the same time, readings above 80 additional signal upside.
Reading these trends has helped me identify three stocks that are headed for troubled times.
3 Stocks To Get Rid Of Immediately
1. BeiGene (Nasdaq: BGNE )
This China-based, clinical-stage biopharmaceutical company is developing innovative molecularly targeted and immuno-oncology drugs for the treatment of cancer.
The company has seen its losses ramp higher in the latest quarter. Much of this can be attributed to posted revenue of $0, missing estimates by $500,000 while producing an EPS of negative $1.52, a miss of $0.27.
While volatility is to be expected in biopharma stocks as they grow, the MFI tells me money has started to flow out of stock. The MFI just dipped below 20, indicating more downside to come.
2. Acme United Corp (NYSE: ACU )
Money is rapidly leaving this supplier of cutting, measuring, first aid, and sharpening products. The stock’s MFI is around 19, with shares trading below both the 50- and 200-day simple moving averages. Combining the two bearish signals creates strong odds of additional downside.
The company missed second quarter numbers, and profits and revenue are both downward trending. EPS plunged 18%, yet the company optimistically maintained guidance. Talk about setting up for more disappointment in the future!
3. ADDvantage Technologies (Nasdaq: AEY )
Despite bouncing handsomely off its lows over the last few days, the MFI is flat-lining at a very bearish 15. Price is currently hitting resistance at the 50-day simple moving average, and the 200-day SMA is just $0.20 higher. Despite last quarter’s metrics looking confident, the MFI tells a different story!
Risks To Consider: Never use a signal indicator to make investing decisions. Always try to combine these signals with supportive fundamentals in order to make sound decisions. Remember, technical analysis is an inexact science.
Action To Take: Consider money flow when making stock market investment choices. If you own the above stocks, look to take profits.
Editor’s Note: All Wall Street firms closely-guard their black box trading systems to gain an edge over their competition . And over you and me. But you can level the playing field by using a proprietary indicator that’s just been leaked. You can access it here .