When a stock pulls back, we want to know two things...
The first is how much the price has fallen. The second is how quickly the pullback is happening.
We don't want to be caught holding bad equities... If a stock is plummeting, we'll follow our stops – and get out as fast as possible when we hit them.
But these two signals don't always spell trouble. They can often show us opportunities to buy...
For instance, if a stock falls too quickly in a short period of time, investors might be getting overly bearish. That's exactly what we're seeing in a major industrial stock today. And it could lead to outperformance over the next year.
Let me explain...
When a stock falls too far, too fast, it may be an overreaction. Simply put, sometimes investors get too scared... and stocks get "oversold."
You can see this by looking at the relative strength index ("RSI"). The RSI is the best way to tell if a stock has moved too far, too fast in either direction.
When a stock's RSI floats above 70, it's considered "overbought." That means the price has staged an extreme rally and a pullback is most likely incoming.
But when a stock is oversold – dipping below an RSI of 30 – the opposite is true. And it also means a rally is likely on the way.
The market is a lot like a rubber band... When it's pulled too far in one direction, it'll snap back. And that goes for individual stocks, too.
Right now, 3M (MMM) may be due for a snapback rally...
The industrial conglomerate's stock fell as much as 19% since the start of the year. That rapid fall sent shares deep into oversold territory in February. Take a look...
3M has been falling rapidly in recent months... But February's oversold indicator is a new potential buy signal.
Since 1980, when 3M has fallen below and risen back above an RSI of 30, the stock has started to rally. In 77% of cases like this, shares have outperformed over the next year.
Buying now could lead to solid gains through 2023. Take a look...
3M has returned almost 8% per year since 1980. That's pretty good. But this stock offers more upside if we buck the typical buy-and-hold strategy...
History shows that buying after oversold setups can lead to outperformance. Similar cases have resulted in 6% gains in three months, 7% gains in six months, and an 11% gain over the next year.
Now, 3M is still in a downtrend. It hit new lows this week. But its RSI has recovered, rising above the critical 30 level... which is what we like to see from this indicator.
I still recommend you wait for prices to rise before buying. But looking strictly at the RSI, this company is one you could consider owning today... And based on history, it's likely good for a double-digit gain over the next year.
Good investing,
Chris Igou
Further Reading
"You want to buy assets when prices are moving in your favor," Chris writes. Investors have been ignoring this market. But recent signals are telling us it could be a buy in the near term... Read more here: What Today's Oversold Extreme Means for This Investment.
Investors are terrified of the market today. With all that's going on in the world, no one knows when the volatility will end. But history tells us that fear could point to further gains... Learn more here: Stocks Are Becoming a Contrarian's Dream.
Companies like 3M that have raised their dividends for 50 years in a row are generally great investments. And one such "Dividend King" has been rewarding shareholders steadily for over 100 years...
E-COMMERCE CAN'T KEEP THIS RETAILER DOWN
Today's chart shows the power of a great business model...
We've talked about the "death of retail" many times in DailyWealth. Traditional brick-and-mortar retailers have struggled to keep up with e-commerce companies like Amazon (AMZN). Some have shuttered their doors forever... while others have stayed afloat by finding their niche. Today's company, for example, offers the discounts consumers love...
Dollar Tree (DLTR) is a $33 billion discount retailer. It runs more than 15,600 stores across the U.S. and Canada under its two brands, Dollar Tree and Family Dollar. Shoppers can find everything from toys and apparel to household cleaners and brand-name foods – all for everyday low prices. And that keeps them coming back... In 2021, Dollar Tree grew total sales 3.1% to $26.3 billion. Plus, the company is planning to expand its already massive footprint by opening 590 new stores this year.
As you can see, DLTR shares have soared 125% from their pandemic lows. They also recently hit a fresh all-time high. As long as consumers keep looking for everyday goods at cheap prices, this company should continue to buck the trend in retail...
