Divergence Is the Rare Market Phenomenon That Will Ease Your Recession Fears

Divergence - Divergence Is the Rare Market Phenomenon That Will Ease Your Recession Fears

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If you’ve been feeling anxious about the market recently, you’re not alone.

With stocks in free fall in 2022, individual investors have grown increasingly bearish. In fact, according to the American Association of Individual Investors’ weekly sentiment survey, the number of Wall Street bulls has dropped to its lowest since the financial crisis of 2008.

Now, it’s pretty obvious why all the bulls have disappeared. A war is raging on in Europe. Inflation is running at record high levels. The U.S. Federal Reserve has begun its aggressive quantitative tightening cycle. And China’s dealing with another round of Covid-19 lockdowns.

Not to mention, oil prices are surging to levels normally seen before a recession. Indeed, the bond market’s big recessionary warning signal — the 10-2 yield curve inversion — flashed a few weeks ago.

Obviously, in the face of these economic and political headwinds, it’s time to sell stocks and run for the hills. Right?

Wrong.

Ever heard the saying, be greedy when others are fearful? Well, that saying has never been truer than it is today.

While everyone else is panicking, my team and I have identified a once-in-a-decade stock market phenomenon that’s emerging right now. And it only emerges in times like these, when everyone is worried sick over a crash.

In fact, this phenomenon is the most bullish market indicator in history.

It would’ve led you to buy Microsoft (NASDAQ:MSFT) at 40 cents in 1988 or Amazon (NASDAQ:AMZN) at $6 in 2001. You would’ve snatch up Nvidia (NASDAQ:NVDA) at 40 cents in 2002. Each of those investments have since turned modest $10,000 stakes into million-dollar paydays.

Well, right now, my team and I are witnessing this phenomenon emerge for the first time since 2008. So, while everyone else may be running for the hills, we’re running toward the stocks displaying this phenomenon. History says we’ll have the chance to turn thousands into millions…

But only if we act now.

So, what’s this phenomenon all about? Let’s find out.

The “Divergence” Phenomenon That Repeatedly Mints Millionaires

We’ve discussed this rare market phenomenon in these issues before, so we’ll be brief in our description this time around.

In short, we call this trend a “divergence.” It centers on huge divergences that emerge between where a stock is trading and where it should be trading. And it only happens about once a decade.

Essentially, our analysis suggests that the long-term trajectory of stocks is ultimately determined by the company’s earnings and revenues. The correlation is unmistakably strong at more than 90%. And that’s about as strong as any correlation gets in the real world.

Occasionally, though, the two trends diverge. That is, stock prices drop, while revenues and earnings rise. Typically, this happens during times of widespread fear in the market. Investors let sentiment analysis — not fundamental analysis — drive their decision-making.

Every time this happens, it’s followed by a convergence. The stock price snaps back to the revenue/earnings trend lines.

Basically, the relationship between stocks and earnings is like a rubber band. Whenever it gets stretched, it eventually snaps back. And those snapbacks tend to produce enormous returns in stocks that have the biggest divergences.

This happened in the late 1980s after Black Monday. Investors who capitalized on the divergence back then had the chance to make 500% returns over the following five years.

It happened again in the early 2000s with the dot-com crash. That divergence phenomenon allowed savvy investors to score nearly 750% average returns over the next five years.

And it happened most recently with the 2008 financial crisis. During that divergence, investors had the chance to score 1,000% gains over the next five years.

It’s a once-in-a-decade stock market phenomenon that has a perfect track record of minting millionaires.

And now it’s emerging yet again.

The Biggest Divergence Yet?

Obviously, there’s a lot of fear out there right now. Just like there was a lot of fear in 1988, 2000 and 2008. And just as it did back then, this fear is creating a divergence.

Across the market, companies are seeing stock prices fall sharply while revenues and earnings keep growing.

Previous divergences created excellent (some would say life-changing) buying opportunities. This one will be no different.

In fact, per our data analysis, the divergence we’re seeing today is the biggest one yet.

Our proprietary divergence metric — which we call the “divergence magnitude” — quantitatively calculates the size of a stock’s divergence. And it shows that many stocks are currently amid historically large divergences. Today we’re seeing some divergence magnitudes north of 500%. For context, our historical analysis never yielded a reading above 450%.

Moreover, our analysis also revealed a strong correlation between the size of the divergence and the size of the convergence. That is, the more an individual stock diverged, the bigger its subsequent rebound was. Think of the rubber band analogy. The farther you pull back a rubber band, the faster and more furiously it snaps back into equilibrium.

And right now, what we’re seeing with stocks is the rubber band stretched to its maximum. What comes next will be the biggest individual stock rally in the market’s history.

The Final Word

I’m not a comedian, but if I may, I’d like to finish this issue with a joke.

Knock, knock!

Who’s there?

Opportunity.

Opportunity who?

You fool. Opportunity only knocks once.

And currently, folks, the biggest investment opportunity since 2008 is knocking on your door. And it won’t knock twice.

Indeed, we’re looking to take advantage of it. We’re seeking out the market’s most divergent stocks to add to our portfolio in our research advisory, Innovation Investor.

In fact, just yesterday, we issued a brand-new “Buy Alert” on one such stock. It’s a small, hypergrowth tech stock that we think will turn into the next big cloud stock. Think the “next Salesforce (NYSE:CRM)” or the “next ServiceNow (NYSE:NOW).”

Yet, its valuation is currently just a fraction of a fraction of those cloud giants’ market caps.

We really like the potential of this stock long-term. And it’s currently trading at bargain-basement levels.

Get in while you still can.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/hypergrowthinvesting/2022/04/divergence-is-the-rare-market-phenomenon-that-will-ease-your-recession-fears/.

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