It’s what you do with information. As a kid, I got my class schedule and went to class. That's what I did with that information – I complied. But one early '70s summer, a kid wrote a class-scheduling program for his high school. He "preloaded" himself into an English class with a dozen girls and no other boys. That was Bill Gates.
Now, the market is giving us a ton of bipolar info. How do we make sense of a market with multiple personality disorder?
Last week, I told you that the Big Money Index fell below 45% and that this was bearish for the short term but bullish for the medium and long term. It stopped right at that crucial 45% level and looks to be heading up.
With last week's data, I might be changing my tune to short-term bullish. Here's why.
September has arrived, and so has "up-volatility." Tuesday, Sept. 3, saw sharply lower stock market index prices. Tariffs started against China. Hurricane Dorian was bearing down on South Florida after wrecking the Bahamas. Financial professionals had to come back to the real world and gone to work after Labor Day. the official end of summer vacation. In short, everyone was edgy and cranky.
Two days later was a very different story. Broad markets rallied wildly. People ask a lot less questions when a market goes up as opposed to down. Here's the question I always ask: what was going on under the surface? If you want to know in what direction the market is really headed, you've got to pay attention to the big money. Tuesday's down day didn't mean much in that regard.
Here's what I saw: out of over 5,500 stocks and over 2,500 exchange-traded funds (ETFs), Tuesday's down day showed 71 buys and 66 sell signals. This means that big money was buying more than selling on an ugly start to September. That buying trend continued the whole four-day holiday trading week. In fact, this was the first week in six where buying outnumbered selling, and Thursday's buying was the largest single day in four weeks. That's bullish.
The main thing I noticed when trawling through the Mapsignals data was that energy selling stopped. The sector has been weighing the market down for weeks. But as shorts started to cover in energy, other weak fundamental stocks also saw short covering.
That alone does not inspire confidence for a rally. I don't like "crap" rallies, meaning that only the weak stocks go up. The good news from what my data says is that it's not all the weak stocks. We saw big money buying in solid growth names this past week as well, most notably in tech.
Looking below, when 25% or more of a sector universe sees buying (or selling) in a week, it goes yellow. For the first week in many, nothing was going on in energy. Tech saw notable buying, with a lot of high-quality stocks being snatched up by big investors. But there was BIG buying in utilities, real estate, and telecom. These sectors would ordinarily be associated with defensive action, but I don't think so in this case.
This is about rates. Interest rates are crazy low, and they will likely get lower here in the United States. Rates are also effectively negative in other parts of the world. For instance, Denmark released its first negative interest mortgage for the best borrowers. You could literally earn 0.50% a year to buy a home there.
Big companies are taking advantage by selling long-term bonds. Why? Because they borrow cheap and buy back their own stock. They get better returns on their own equity. Buybacks lift the market. In this low-rate environment, investors seek higher yields – specifically stocks with typically higher dividend yields. The utilities, real estate, and telecom sectors are rich with higher-yielding stocks.
And as we see investors allocating capital to equities, it's good for all equities. Remember, owning stocks right now is way better than owning bonds after tax:
Another big reason why I am bullish is the 30-year bond yield went lower than the dividend yield of the S&P 500 a little while back. Even since recovering, after tax, it remains lower:
On the fundamental and news front, things also look bullish. Sales and earnings were great in the second quarter, and I expect the upcoming third quarter earnings will be strong as well. Impending China trade talks were confirmed by both parties, but we know by now that this is far from a resolution. A no-deal Brexit was met with a roadblock with a vote of no-confidence for Boris Johnson. These things won't necessarily ward off a normally bumpy September month, but we also have a typically strong rally into year-end to bolster the bull case.
The market is up and down, which is normal for the choppy August and September months. We all have access to the same information. It's what we do with it that matters. I see bullish days ahead for U.S. stocks. Aside from being best in show and strong on their own merits, they are the sanctuary compared to the rest of the world.
As far as tolerating the stomach-churning volatility that the market can give us, listen to Fred Jung from the movie "Blow" – "Sometimes you're flush, and sometimes you're bust, and when you're up, it's never as good as it seems, and when you're down, you never think you'll be up again, but life goes on."
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Weak markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.