How This Current “Divergence” Points the Way to Bargain Stocks BY JASON BODNER, EDITOR, QUANTUM EDGE PRO These are not normal times. I know… not exactly breaking news, right? But I’m talking about more than just gut-wrenching volatility and historic selling. For a quant investor, all this craziness wreaks havoc with the data we depend on. My Quantum Edge system scours millions of data points every day to find those rare stocks with the key characteristics best predictive of higher prices. To oversimplify a bit, they are… - Superior fundamentals – a growing and profitable business
- Strong technicals – positive trading action
- Institutional support – the biggest investors on the planet are also buying
They are tremendously effective at finding winning stocks almost all the time. But anyone investing in stocks right now knows that those last two factors are hard to come by. Technicals have weakened significantly in the dramatic downdrafts, and Big Money flowed out during those massive selling days last month. If you think that means quant analysis loses effectiveness in bad markets, think again. It can still find the best stocks to buy… And most are trading at big discounts. We need to refocus our quantitative lens a little bit and sharpen the current picture to continue putting the odds in our favor for outsized gains. | Recommended Link | | | | A mysterious financial figure – called “one of the most important money managers of our time” by national media – has issued a scathing economic warning. His controversial video exposes how an invisible force is rewriting the rules of wealth creation. The question everyone’s asking: Who dared to break ranks with the financial elite? |  | | The Question Before I get into how we shift our analysis, let me briefly answer the question on most investors’ minds. Yes, now really is a good time to buy stocks. Not just any stock, of course. Most don’t have what it takes to generate the high probability of profits I look for. But those that do are juicy bargains right now. I conducted several data studies after the four wipeout days in early April, and all showed the same thing: That kind of selling can’t last, and it is always followed by higher prices down the road. That doesn’t mean volatility disappears, but it does mean we’ve likely seen the worst of it. This is confirmed by my system’s tracking of institutional money flows. My algorithms sniff out Big Money buys and sells each day – despite their best efforts to keep quiet – and this output shows how dramatically institutional selling dried up after those four massive down days. 
Source: MAPsignals.com You won’t see a more dramatic shift – from historic selling to below average selling in just days. This further supports my initial analysis that most of the selling was fund managers deleveraging. As the outlook blurred and uncertainty increased amid tariff talk, fund managers were ordered by their firms to reduce risk and margin debt. The only way to do that is to sell stocks. Once debt and risk are reduced, the forced selling eases. That money will come back into stocks, though, and firms will once again “leverage up” in a better market. That’s when we could see a ripper of a rally. Divergence Can Point the Way to Bargains We can still use quantitative analysis to find high-probability winners even with two of the three major factors coming up dry. The technicals are generally less predictive right now because so many stocks got hammered – even the best of the best. And my Big Money Index isn’t yet showing many buy signals either. That leaves the fundamentals, which thankfully aren’t influenced by either one of those. The fundamentals don’t change when investors are panicky or euphoric. They tell us about the quality of the business itself. (My Quantum Edge system’s Fundamental Score is similar to the TradeSmith Business Quality Score.) So, here’s what I see right now: Great companies with muscular fundamentals but low technicals and no Big Money buy signals. These are often the best buying opportunities. I call these “divergence” plays. I typically prefer strong fundamentals and technicals. But when the two diverge with the fundamentals still among the best in the market, data shows this gap typically closes with shares rising to align with the fundamentals. The payoff may not be immediate, but it is both probable and potentially sizable. Here’s a great example: In early 2022, Nvidia (NVDA) fell sharply amid rising interest rates to combat inflation, growing recession concerns, and fears that semiconductor demand was softening. The stock crashed 50% in the first six months of the year, and NVDA ended the second quarter with a whopping 64.5-point divergence between the fundamentals and technicals. Its Fundamental Score was excellent at 79.2 while the Technical Score registered extremely low at 14.7. Shares didn’t recover immediately, but look what happened over the next two-and-a-half years… 
We can’t count on 900% returns every time, but I do see similar opportunities right now. The Biggest Divergence Among My Recommended Stocks The widest spread between the fundamentals and technicals among my recommended stocks in TradeSmith Investment Report and Quantum Edge Pro is a whopping 58 points on Camtek (CAMT). 
Source: TradeSmith Finance Camtek is a leader in advanced inspection and metrology (measurement) equipment used to make semiconductors, primarily to ensure chips are performing as expected and to minimize the number of defective chips. Its systems are used by the top 20 semiconductor manufacturers in the world. CAMT’s overall Quantum Score is 53.5, which is outside my normal buy zone of 70 to 85. But as I said, things aren’t exactly normal right now. That’s why the nearly 60-point spread between the fundamentals and technicals catches my attention. It’s massive, rare, and not likely to stay that way. It’s a quant version of oversold, and that blistering Fundamental Score of 87.5 is likely to lift shares – and therefore the Technical Score – in the months ahead. Chances are you’ll find similar opportunities in your own research – quality companies that have been beaten down to bargain prices. Let me also be clear that there are still “normal” quant opportunities out there. There may be fewer stocks than usual with scores where I like to see them, but they do exist. I’m thankful that my Quantum Edge system sorts through all the data and makes them easy to find with a few clicks. In fact, I am recommending one such stock later today in the new TradeSmith Investment Report monthly issue. Its Quantum Score is 72.4, with both the technicals and fundamentals also rating in the 70s. I am confident that both types of setups will produce big profits heading into the second half of the year… and probably for a long time beyond. Talk soon, 
Jason Bodner
Editor, Quantum Edge Pro | 
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