The Mind Behind the Quantum Score Sees New Opportunity Ahead I don't need to introduce my colleague Jason Bodner: At this point, TradeSmith readers should be more than familiar with the former algorithmic trader who's managed over $13 billion in assets and is the brain behind Quantum Edge Pro.
Not only because he's the face of PowerTrends and the TradeSmith Investment Report, but because I spoke with him about his research in a recent interview issue.
Well, today I've invited Jason back for another chat. In the time since we last spoke, Jason and his team have been monitoring the markets and studying the results from the Quantum Edge system we use here across TradeSmith. And as interest rates begin to fall, Jason has identified a prime opportunity for investment in the coming months.
He's calling it an "Accelerator Window," and the investors who take advantage of its opening could potentially see their portfolios grow big time – and fast.
It's fascinating stuff, and it's so tied into the current market moment that it's worth sharing with the full TradeSmith audience. Read on for a transcript of our latest chat, as I pick his brain – and find out what we can look forward to in the leadup to and after Election Day.
Mike Burnick: Welcome back, Jason! Happy to have you speak to the Inside TradeSmith audience again – it's always a pleasure hearing your insights and your analysis.
Jason Bodner: Happy to be back so soon! Thanks again for having me, Mike.
Mike: Now Jason, before we get started, I should let you know: We'll just be transcribing this interview – there's no video component, so you can put your Rangers T-shirt back on. That's fine.
Jason: Ha! Come on now Mike, I'm going to the Panthers game tonight. Give me a break!
Mike: There you go! But wait, where's my ticket? You're supposed to hook me up!
Jason: I actually just bought a bunch of tickets recently, like I mentioned last time. That's something I was going to talk to you about – you and I need to go to a game, or at least have lunch.
Either way I owe you, and I haven't forgotten. You'll get that hook up!
Mike: I knew you wouldn't forget! That's cool. Any game, any time would be fine by me. We'll have to figure out dates after this.
Jason: Perfect. So, for a little backstory to all this, since it keeps coming up:
I pushed Mike to come meet me for lunch one week a while ago, had him drive down to me and everything. And he showed up at lunch and then wouldn't you know it, I had it marked in the calendar for the day after.
So, he sat there by himself – and I totally stood him up like a jerk! That's why I owe him.
Mike: But hey, I had a great lunch!
Jason: You know, I'm sure the company was terrific.
Mike: I was just chit-chatting with people at the bar, you know. Maybe even better company than you would have been. I don't know...
Jason: I still feel so bad about that!
Mike: Don't worry about it. We'll catch up at the next holiday party.
Jason: Yeah, that's what we did last year, but it's not the same! So, we'll do a local meeting too.
Mike: Sounds great to me! But that's enough chit-chat – let's get down to business.
So, Jason. You've got some new opportunities in the market to talk about and I've got a couple of hard fire softball questions for you. Are we ready to get started?
Jason: Let's do it!
Mike: All right. Jason, it's clear enough already, but it's great to have you join us again.
So, first off: I noticed something that you wrote just last week in your TradeSmith Investment Report. You mentioned that the recent choppiness in markets was probably not the end of the October volatility – because we're in an election year, after all. And in election years, we have the possibility of what you call an "October Surprise."
Jason: That's right. And for the record, an "October Surprise" is any sort of major news event – planned or not – that pops up to influence the election at the last minute.
Mike: Right. Now, we're just three weeks away from the U.S. presidential election as we're talking. When Inside TradeSmith readers get this, there will be exactly two weeks to go until Election Day.
How do you expect the markets to react leading up to the event – and what do you expect us to see from the markets afterwards?
Jason: That's a great question.
So, I've actually done a fair bit of research on this recently. Looking at the returns of every October since 1990, across the four major stock market indices. And what we've found, my team and I, is that the first half of the month is typically weak for the market overall. And the second half of the month is typically stronger, with more positive results.
Now, here's why this is interesting: October, November and December are the three strongest months of the year for the stock market when it comes to overall performance, but October is weak in the beginning and strong in the end. Whereas, the following two months are typically just strong and positive all the way through, with November standing out as the strongest month of the year.
So, what that means is we're now entering the historically smooth part of October. Now that we're, you know, in the back half of the month. The market should just cruise along from here.
However... when you look at election years, the entire month of October is typically a little weaker, historically speaking. So that's looking at 1992, 1996, 2000, 2004, 2008, you know? 2012 and 2016 and 2020 – even if some of those years were strange cases.
Mike: Certainly. Our readers should be familiar with the idea – our Trade Cycles seasonality tools show similar data when we check on the historical trends.
Jason: Right. Now, it's interesting to note that one really bad year, like 2008, for instance, can significantly skew the results. But even with that in mind, we should expect a little bit of volatility in the next few weeks at the least.
And there's one other caveat to this: Wall Street loves a decisive election. I think you know that, Mike. And while this whole election cycle has been bizarre, what we're seeing now is that Trump is pulling away from Harris and taking the lead.
Mike: Really?
Jason: That's right. And that's based on the latest odds – I look at RealClearPolitics' data for this myself. They have betting odds for the presidential election and the congressional elections, and right now, Trump is sitting at 58%. That's based on the electoral college, not the popular vote.
So as things become a little more certain, especially if these numbers stand going into the election, I would expect less volatility. But should that lead narrow, I expect more volatility.
And that can narrow very quickly with an "October Surprise," like you mentioned. Though so far... there haven't been major fireworks yet. But this is the peak time when candidates try to embarrass each other and drag each other's names through the mud.
So, all this is a data informed way of saying it would not surprise me one bit if we saw some major market volatility between now and Nov. 5.
And the last thing I would add is that our Big Money Index went overbought, just today.
[Editor's Note: This interview was recorded on Thursday, Oct. 17.]
Jason: Now, when 80% or more of all our signals in the last 25 days are buys, according to my research, that means the market is overbought. However, that doesn't mean we should run for the hills and sell stocks – because the market can stay overbought for a while.
Historically, it tends to stay overbought for about a month.
However, like we said, an "October Surprise" can really trigger some sales. And those events don't have to come from the U.S. news cycle: Conflicts blowing up further in the Middle East could, for example, qualify as a surprise and trigger some volatility.
So, all this to say, the markets are in a good place. But we're not on the most solid ground.
Mike: I think that sums it up pretty well. Thanks, Jason.
Now, for those readers that may not be aware of this... The Quantum Edge system that you pioneered, it focuses on big money flows – both into and out of stocks. And of course, your win rate, over 70% on your trades since 1990, obviously is a testament to just how powerful that system is.
You just mentioned that your Big Money Index – for our readers, that Index measures cumulative money flows in the markets. Jason, you said it just got to an overbought level today – that's after being kind of stuck in a trading range around the 70% buy signal area for a while, if I recall correctly.
You've written before that you expected these big money flows to break one way or the other from that range, either breaking out to the upside or moving down from it.
So now that the Big Money Index is up above 80%, does that mean we should be looking at an upside breakout in the markets?
Jason: Yeah, I think that's a great question.
So first off, I should note something about the win rate you mentioned: The 70% win rate since 1990 applies to one of our model strategies.
Currently, in the TradeSmith Investment Report portfolio, we have an open trade win rate of 87.5%. And in the Quantum Edge Pro portfolio we have a win rate of 78.3%. So that's sort of keeping in line with what we can expect, based on the model.
And I don't say that to boast. I say that because I try to place everything in reliable data, data that shows us repeatable phenomena.
Mike: Makes sense. You've always been data-driven.
Jason: Now, when it comes to the Big Money Index, like you said, it was in a very tight range between 71% and 75% since September. And that encompassed a lot of that September volatility we saw. On Oct. 11 – just a couple of days ago – it broke out to the upside, to 75.9%.
And as I mentioned earlier, today it's above 80% for the first time. So, the Index did make an upside breakout already. And I would expect it to continue to hover above 80% for a while.
Now, let's contextualize that again – just because the Big Money Index is going up over 80% doesn't mean markets are going higher. It just means 80% of all signals are buying.
That means there's money inflows: people are buying stocks; investors are buying stocks. And there are a few ways that signal percentage can shrink. We could just see liquidity dry up, which might happen in the coming weeks as there's uncertainty towards the election.
We could see selling take over, or we could see things stay the same. Odds are we'll see the signals stay the same right now unless we get like one of those "October Surprises" we talked about.
So, it's really healthy that the Big Money Index broke out to the upside and is making a sustained move. Even if it's overbought, it just means demand is more than supply right now for stocks, on an institutional level.
As long as that stays that way, that's great for us. And, you know, that sort of factors into other events that look for a strong fourth quarter and first quarter of 2025.
Mike: Right. Right. We're on the right track then. That's good to know.
You also wrote recently in Quantum Edge Pro, just this week I believe, that your data shows mostly smaller and mid-sized companies are kind of in the sweet spot? That those are the ones that should perform best going forward.
Now, of course, we all know the big caps like the S&P 500 have been kind of leading the way thanks to the "Magnificent Seven." But why specifically do you see some of the better opportunities in small and mid-cap stocks?
Jason: Yeah, there's honestly a great tailwind.
We have tons of research that we've done that has shown, historically, after the first rate cut the Russell 2000 rallies substantially and the S&P Mid-Cap 600 rallies substantially as well. Plenty of strong forward returns from the first rate cut on there.
And of course, we got our first rate cut from the Fed on September 18.
I think the forecast is for another two rate cuts of 25 basis points apiece, coming Nov. 7 and Dec. 18. And then we should see at least another four or five rate cuts through 2025.
Now, why this is meaningful for small and mid-caps is... the large-caps, believe it or not.
The Magnificent Sevens, all the mega-companies that have the cash cows? They don't rely so much on debt to finance their growth, like a smaller or mid-sized company does. The smaller companies need to go out and borrow money. And anyone who's borrowed money to buy a car or a house lately knows interest is high.
And if all of a sudden, the Fed is slashing interest rates, that has a direct effect on the borrow rate of these smaller companies. But it's important to contextualize this – because the Fed just cut rates by 50 basis points. Which, that's half a percent. And that doesn't sound like that much.
But when the target Fed funds rate was 5.25%, no, that 50 basis point cut represents almost a 10% decrease in the overall interest rate. And if we're talking about two more rate cuts coming in the next couple of months, getting rates down one full percentage point is an almost 40% decrease.
So, if you're a small company, you're borrowing money and suddenly it's 40% cheaper. A lot of that should fall through to the bottom line.
I think the big smart money investors are ahead of that curve and started buying small and mid-caps in July and August. But I think we're just at the tip of the iceberg on that market shift – because we're due to have the strong economic data, the lack of a hard landing, the lack of a soft landing.
The media is now talking about "no landing," right?
So, if we have no recession, strong economic data and collapsing rates – and by the way, the last thing I will say is... we're in earnings season now. And S&P 500 earnings. Historically, for the past 10 years, about 78% of S&P component companies have beat analyst estimates for earnings, and about 64% beat sales estimates.
And we're seeing that happen quarter after quarter. So, earnings are growing and rates are falling.
Economic data is strong, too, and you have small and mid-caps which have been really under pressure and unloved for the past two years, especially since COVID. All of a sudden, a major headwind has been lifted – and so I think that is where we'll see the biggest catch up and the biggest opportunity.
Mike: Yeah, that's interesting that you make that point.
I read a research report the other day from, I think it was FactSet or IBES. They mentioned that the Russell 2000 small-cap stocks are expected to grow earnings next year by over 40% – compared to 14%! – for the S&P 500.
So that's a good reason to focus on small caps right there.
Jason: Yeah, that's a great stat. And if you think about it, imagine the business does nothing to grow its revenue, but the cost of capital still goes down by 40%. That falls right to that bottom line. So that grows earnings. But now add in a strong business environment and incentives for the American consumer. I mean, that's great. Because the lower rates affect the consumer too, right?
We're strangled by credit card debt and housing debt and car debt. And if you can refinance that and put more money into your pocket, it should go into the economy, which would benefit smaller and mid-sized business.
Mike: Absolutely. Right on the nose there.
So, we talked a little bit about how rate-cut benefits fall based on size. You know, market cap size. Jason, what sectors of the stock market are you most focused on right now? Obviously, those with the strongest big money buy signals currently, I would suspect. But what are some of your favorites in terms of new opportunities?
Jason: Oh, for sure, those with the strongest signals. But looking at sectors...
Look: I always love Technology, Industrials, and Consumer Discretionary. Those are my favorite sectors to lead a big bull market higher – because they typically are emblematic of a very strong economy. That said, in my research right now, Technology ranks fourth among all the S&P 500 sectors. However, it has one of the highest scores when it comes to fundamentals.
When I look at a particular sector of the market, I take all the stocks in that sector and I score their fundamentals and technicals. And sure, Technology might not be top of class right now, but you also have a sector like Financials which is leading the whole market higher and things aren't perfect either. The fundamentals are lagging, they're about middle of the road, but technically, it's a very extended sector.
So, I really like Technology. Primarily because I think it's not hard to argue that it's the engine of growth for our economy, our society, and you know, the world at large.
Mike: Can you talk a little more about that?
Jason: Sure. I mean, Mike, I'm looking at your setup right there: you've got four screens staring at you with probably a lot of processors and data moving, and we're talking on video technology now...
And we're just chatting here. So, I think our reliance on tech overall is not likely to decrease – it's only increasing from here. So, I always like Technology.
With that said, looking into the smaller mid-cap space, software firms have been under pressure for a while. I think they're due for a resurgence. Another area of interest that's been kind of off the radar might be Real Estate.
And Real Estate is really interesting. Because REITs (Real Estate Investment Trusts) are legally required to pay out between 70-90% of their net profits in the form of a dividend.
Interest rates are declining. So, all of a sudden... and this is something we talked about last time.
There's roughly $6.5 trillion sitting in money market accounts right now, Mike. Up until a couple of weeks ago, all of that money was sitting tight and earning a 5% return. Now it's only earning 4.5%. And rates are going to come collapsing from here.
So, all this cash hiding out trying to earn interest is likely to chase other yields, and Real Estate as a sector is providing great dividend yields – because of the legal structure of REITs offering that dividend benefit. It is a really interesting place.
And then you add on top of that, CEOs everywhere are calling for workers to get back to the office. Google wants people back in the office, Jamie Dimon of JP Morgan famously wants people back in the office. Elon Musk has straight up said "if you don't come to the office, you're not going to work here anymore." Amazon's wanting people back in the office too.
In fact, one FactSet report that I read suggested that up to 90% of CEOs are contemplating some form of return to office mandate. So, all these commercial real estate companies that have been kinda, you know, kicked to the curb since COVID – there's plenty of potential for a revival there.
All this to say, I think there's a potential for a real resurgence across the sector. In a falling rate environment, Real Estate tends to do really well.
Mike: Yeah, absolutely. Because just like for small-caps, borrowing costs on real estate comes down too, and that also falls to reach the bottom line. That's an interesting sector right there for sure. I've got my eye on as well.
Okay... So, we've talked about the election. And we talked about the volatility that it's probably going to produce in the weeks ahead. But let's have a little bit of fun with this now, before we wrap up. And at the same time, Jason we'll work in your peerless forecasting abilities.
Jason: All right. I'm ready for it!
Mike: Alright. So, Jason, you've been busy studying the market for opportunities coming from the Fed's rate cuts. But that's been pretty agnostic of the U.S. presidential election results. I'm going to turn that around on you.
What's your one trade that you expect to be a big winner if Trump is elected? And likewise, what's your winning trade if Harris is elected?
Jason: Oh, that's interesting.
Mike: You have 30 seconds.
Jason: Ha! Okay. Uh... Alright.
So, the fun part about that is, a Trump win is good for small and mid-cap stocks, right on the money.
Why? Because he's good for small business, good for real estate. He's anti-tax and he's going to pressure for faster rate cuts. So, this benefits small and mid-cap stocks overall.
Now, on the other hand, Harris winning is beneficial for large-cap tech stocks. We've seen that with an Obama and a Biden administration, they tend to be more pro-regulation and more aggressive, tax wise. We can expect Harris to be similar.
However, the caveat is... they're both good for small and mid-caps because of that falling interest rate environment that we just mentioned.
So, for me, where I'm interested in investing after the election are the small and mid-cap stocks with growing sales, growing earnings, expanding profit margins and low debt levels.
Mike: So that's a winning trade no matter who wins. I love it.
Jason: Yeah, that's it. Winner, winner, chicken dinner, no matter what.
Mike: Thanks very much for joining me again today, Jason, and sharing your thoughts. Always a pleasure to hear what's on your mind.
Jason: Thanks so much for having me, as always. Love chatting with you, Mike. Look forward to doing it again next time we've got the opportunity.
Mike: You bet. Looking forward to that Panthers game sometime soon, too.
Jason: Yeah! We're comparing calendars after this. I'll send you some dates. It's a longer drive for you, so we'll let you pick the date.
Mike: Sure thing. And since you got the tickets, I'll buy your first drink.
Mike here.
Jason might've taken an interesting approach answering my last question, but he makes a good point.
No matter who wins the presidential election, there will be prime opportunities to profit from the markets (we talked about this last week and will revisit again on Thursday). And one of the most interesting opportunities is open right now, all thanks to falling interest rates.
There's a good reason why Jason kept bringing it up in our interview: he believes that right now, we're in a small and very rare window of opportunity – an "Accelerator Window" – where making the right investments now could potentially lead to outsized returns over the next year.
And Jason hasn't just spoken with me about this. Recently, he chatted with Louis Navellier to share his findings in a live broadcast – pulling back the curtains on his powerful Quantum Edge system and highlighting just how this Accelerator Window could give you the chance to grow your portfolio massively... if you move quickly enough.
It's the kind of scenario that could shave years off your wait for retirement – and Jason has all the details you'll need to get prepared for it. He's also picked out five stocks he believes are especially well-positioned for this market moment, and you won't want to miss your chance at those.
Click HERE to get the details, and find out what Jason's been working on at Quantum Edge Pro.
Good investing,   Mike Burnick
Senior Analyst, TradeSmith |
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