Sometimes, stocks are an easy bet.
Think back to the fearful, chaotic moments we saw during the pandemic crash of March 2020. Or the summer 2022 bear market, when equities were barely hanging on under the threat of inflation and higher interest rates.
Momentous periods like these offer a great risk-reward setup. Typically, during these windows of opportunity, stocks are well off their highs and the crowd is uninterested in playing the stock market. That’s the ideal time to tap into your cash reserve and buy stocks with both hands.
We saw another moment like this in early November, when we showcased a powerful study indicating a monster move up was ahead.
However, the pendulum swings both ways…
When you’ve been investing long enough, you know that stocks have repeatable behaviors, jumping and dumping in a continuous, repeating cycle. There are red-hot moments when expectations are exceptionally high for a company… and there isn’t an inch of bad news to be found for miles.
Then there are situations when stocks reach nose-bleed levels – extended in extreme fashion.
In short, sometimes stocks are a bad bet.
That’s where we find ourselves today with one of the hottest consumer stocks of 2024 – Walmart Inc. (WMT).
Now, full disclosure… I’ve owned this discount retailer for years. That said, I’d be reluctant to add at the current levels.
One ultra-rare bear signal is flashing red. Historical evidence points to a high-probability pullback coming near.
As always, don’t take my word for it… Let’s prove it!
Walmart (WMT) Shares are Extremely Overbought
I love to circle back on prior historical studies we’ve shared with you.
If you recall, last month I made a bold data-driven call to pare back those Utility stock bets.
The crowd has been absolutely dazzled by their historic rise. However, the sector breached a momentum threshold that signaled a warning sign.
That same indicator is now pulsing bright red for Walmart… the Relative Strength Indicator (RSI).
As a reminder, the RSI measures the overall relative trend of an asset. Often, traders use the prior 14 days of data.
When the reading breaks above 70, we can safely call the stock overbought.
Now, using this framework, check out the chart below. It shows Walmart (WMT; black line in the chart below) along with its RSI reading (purple bar) and a price comparison to the S&P 500 (orange line).
WMT recently topped the 80 level (right red circle)… something it hasn’t done since January 2018:
Note the prior time in 2018 (left red circle) when this overbought signal hit. Soon after, the shares experienced a healthy pullback.
This is why I’m waving the caution flag today. There’s evidence that’ll prove now is not the time to buy… and you’ll be better served buying at a discount.
The Rare Moments When Walmart Shares Offer No Discount
As we like to say here at TradeSmith, data cuts through the noise of the markets. It gives you the insights your naked eye would normally miss.
And right now, the data’s telling us you’ll want to be patient before buying WMT.
I went back 30 years and tallied all instances when shares of Walmart clocked an RSI of 79 or higher using weekly data. Essentially, I wanted to isolate periods similar to now.
Then, I plotted the forward returns for those instances. After doing so I learned two valuable realities:
First, it’s incredibly rare for Walmart stock to ever reach 79 or above. It’s only happened 12 times… and it hasn’t happened since 2018.
And second, readings of 79 or higher are costly over the near-to-medium term.
Here’s the hard-hitting proof. Whenever WMT’s RSI breaks above 79:
- A month later, the shares are flat on average
- Three months after, the average return is down 8.7%
- Six months later, the stock dips an average of 7.4%
I’ll admit, when I ran the numbers, they blew me away.
There are no coupons offered if you’re shopping the WMT stock aisle.
But to take this study a step further, I needed to know how these rare overbought signals compared to the normal behavior of Walmart shares.
So, to do this extra exercise, I averaged all of the weekly 30-year returns for WMT. When you compare those expected returns to the extreme RSI readings, it puts this overbought signal into much-needed context.
Let me show you what I mean.
Below the black bars reveal an upward-sloping return profile for shares of Walmart since June 1994. In layman’s terms, on average when you buy shares of WMT, you can expect to earn a solid return on a one-, three-, six-, and 12-month basis.
Contrast that to when you plow into WMT with an RSI north of 79… the difference is striking:
Now, let me be clear. I’m not suggesting you run and tell Grandma to sell her Walmart stock.
No, I’m suggesting you’re likely to get a better entry price in the months ahead.
I’m sure Sam Walton would agree that’s worth the wait!
If you’re a near-term trader, keep an eye on a healthy pullback coming soon. My bet is you’ll get an attractive discount.
Walmart’s slogan is simple: Save Money. Live Better.
Today’s data-driven slogan is simple, too: Save money… and wait for a better price.
Top-tier insights like these are what TradeSmith is all about – empowering the retail investor with cutting-edge technology and powerful analytics.
It’s the best way to stay ahead of the market’s next moves. Get started today.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
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Source: TradeSmith