Weekly Update: How to Time the Market (Seriously)
Good evening, and welcome to this week’s edition of Stealth Trades!
Most people say it is impossible to time the market.
I disagree.
You’ll never get it perfect, but there are proven indicators that, more often than not, have identified turning points in the stock market.
I want to talk about one of those today.
It is called the NFCI which stands for National Financial Conditions Index. This figure, published weekly by the Chicago Federal Reserve, measures how readily money is available in the financial system.
It combines over 100 indicators like credit costs and loan activity into a single reading. A rising NFCI indicates tightening conditions while a falling value suggests easing conditions and better liquidity.
The higher the NFCI, the worse it is for stocks and the economy.
The chart above shows this reading dating back to the 1970s. Recessions are highlighted in grey and coincide with above average NFCI numbers.
But this index can also alert investors to short-term shifts in the market.
Here is a comparison of the last 8 months…
On top in blue is the NFCI. The Nasdaq Composite Index is displayed below in white.
Notice how periods where the NFCI Index was rising (tighter money conditions) led to dips in the stock market.
The opposite is also true. From August of last year through last month, loosening conditions led to higher stock prices.
Things flipped again in February, leading to a selloff over the last 6 weeks.
This inverse relationship has been maintained for several years…
A surging NFCI reading in 2022 coincided with the bear market.
And when this trend reversed lower, the stock market screamed higher.
The National Financial Conditions Index is not the holy grail. There are a few false signals here and there.
But when we combine this with other metrics like the net new highs indicator and the percentage of stocks above key moving averages, we get a pretty good idea of when we need to step on the gas and when it might be best to move money to the sidelines.
I won’t get too far in the weeds in this email, but I will be going over this in more detail in Monday’s LIVE Stealth Trades meeting over Zoom at 9am ET.
If you are reading this email, you have access to that session. You’ll get an email Monday morning with a link to join.
I’ll see you there.
Best wishes for your trading,
