When a stock drops, we want to know two things…

The first is how much the price has dropped. The second is how quickly the recoil occurs.

We don’t want to be caught holding bad stocks… If a stock falls, we’ll call our stops – and get out as fast as we can when we hit them.

But these two signals do not always mean trouble. They can often show us buying opportunities…

For example, if a stock falls too quickly in a short time, investors could become too bearish. This is exactly what we see in a large industrial park today. And that could lead to outperformance over the next year.

Let me explain…

When a headline falls too far, too fast, it may be an overreaction. Simply put, investors are sometimes too scared…and stocks are “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 is considered “overbought”. This means that the price has staged an extreme rally and a pullback is most likely to come.

But when a stock is oversold – dipping below an RSI of 30 – the reverse is true. And that also means a rally is likely underway.

The market is very much like a rubber band…when pulled too far in one direction, it retracts. And that also applies to individual stocks.

Right now 3M (MMM) may be due for a stimulus rally…

The industrial conglomerate’s stock has fallen 19% since the start of the year. This rapid drop pushed stocks deep into oversold territory in February. Looked…

3M has been falling rapidly in recent months… But the February oversold indicator is a new potential buy signal.

Since 1980, when 3M fell below and climbed back above an RSI of 30, the stock started to rally. In 77% of cases like this, stocks 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 benefits if we reverse the typical buy and hold strategy…

History shows that buying after oversold setups can lead to outperformance. Similar cases resulted in 6% gains in three months, 7% gains in six months, and an 11% gain in the following year.

Now 3M is still in a downtrend. It hit new lows this week. But its RSI has recovered, breaking above the critical level of 30…that’s what we like to see on this indicator.

I still advise you to wait for prices to rise before buying. But looking strictly at ROI, this is the business you could consider owning today… And based on history, it’s probably good for a double-digit gain over the next year.

Good investment,

Chris Igou

Further reading

“You want to buy assets when prices are moving in your favor,” Chris writes. Investors ignored this market. But recent signals tell us that it could be a short-term buy… Read more here: What does the extreme oversold mean for this investment today.

Investors are terrified of the market today. With everything going on in the world, no one knows when the volatility will end. But history tells us that fear could signal new gains… Read more here: Stocks Become A Violator’s Dream.

E-COMMERCE CANNOT SUPPORT THIS RETAILER

Today’s chart shows the power of a great business model…

We have spoken of the “death of retail” several times in daily wealth. Traditional brick-and-mortar retailers have struggled to keep up with e-commerce companies like Amazon (AMZN). Some closed their doors forever… while others stayed afloat by finding their niche. Today’s business, for example, offers the discounts consumers love…

Dollar Tree (DLTR) is a $33 billion discount retailer. It operates more than 15,600 stores in the United States and Canada under its two brands, Dollar Tree and Family Dollar. Shoppers can find everything from toys and clothes to household cleaning products and brand name foods, all at everyday low prices. And that keeps them coming back… In 2021, Dollar Tree grew its total sales by 3.1% to $26.3 billion. Additionally, the company plans to expand its already massive footprint by opening 590 new stores this year.

As you can see, DLTR stocks are up 125% from their pandemic lows. They also recently hit a new all-time high. As long as consumers continue to seek everyday products at low prices, this company should continue to buck the retail trend…