In 2014, London cabbies were upset. Uber Technologies, Inc. (UBER) was muscling in on their territory. So, 4,000 cab drivers protested and ground parts of London to a halt. In an epic backfire, this led to an 850% increase in downloads of the Uber app on the day.

When things get extreme at one end, it creates a vacuum at the other. Cabbies wanted to suppress Uber; they ended up doing the opposite. This reminds me of everyone buying stocks. No one wants them to go down or thinks they will, but inevitably, one-way traffic will lead to the opposite.

U.S. stocks had a down week for the first time in a while. But we need a pullback. It's healthy and overdue. I've been talking about being overbought for weeks now. So far, 2020 has been kind to stocks, but one major U.S. index is negative year to date (YTD): the Russell 2000. My data has more correlation with that index for two reasons:

  • The Russell 2000 rebalances, which makes the index more equally weighted compared to the S&P and NASDAQ.
  • We measure big buying and selling on thousands of stocks equally. Therefore, it makes more sense that the Big Money Index is overlaid on the Russell 2000.

So looking at the Russell 2000 is important for big money buying and selling. There are three things I'm seeing in the data that stand out:

  • The Big Money Index dropped two days in a row. Friday saw 59% sell signals. We haven't seen one-day selling like that for over 10 weeks!
  • Tech is heavily overbought. It reminds me of when we noticed mega-buying in health care. Look how extreme it is: 
Chart showing tech buying and the performance of the Technology Select Sector SPDR Fund (XLK)
  • Health care mega-buying is slowing. Weeks ago, we pointed out what looked like a crest in buying. Look where it is now; buying dropped significantly:
Chart showing health care buying and the performance of the Health Care Select Sector SPDR Fund (XLK)

As seen above, focal buying has been in tech above balanced buying in all sectors. Looking below, even with a down market in a four-day week, there was still substantial buying in tech, utilities, financials, real estate, consumer staples, and telecom.

Chart showing unusual institutional (UI) signals by sector

The short week also brought more concentrated exchange-trade fund (ETF) buying. The one-year average is nine ETF buy signals per day. This past week has been 17 per day – slightly lower than the one-month average of 20 per day.

Make no mistake, that's big activity in ETF buying. This level of risk-on through ETFs indicates a tactical shift into equities through money managers – likely plain vanilla. That means big institutions and financial advisors are likely allocating capital to equity risk. It's interesting to note that, out of the 81 big ETF signals last week, only one was an international ETF: the iShares MSCI Canada ETF (EWC). (FYI: googling just "EWC" returns European Wax Center.)

As we discussed above: the Big Money Index is still very high, but once a change of direction occurs, it'll be a better indication of when we might expect a correction. Last week was the first change of direction we have seen in almost three months. It may just be the start of a broader shift.

Chart showing the big money index (BMI) and the performance of the Russell 2000 

The above chart finally shows a crack in the relentless buying. Let's look at this a different way: The following chart shows buy and sell signals netted against each other. If there's more buying, the bars are green, while more selling means red. If you look carefully, you'll see there were only two red bars since October. One was on Dec. 3, 2019, and the market was not yet overbought. The other one was Friday. 

Chart showing the performance of the Russell 2000 and net buys/sells

Here it is zoomed-in to make it easier to see:

Zoomed chart showing the performance of the Russell 2000 and net buys/sells

This melt-up has been big, but I haven't seen Main Street getting excited or even mentioning it. The crypto and cannabis buzz is still alive and well in retail newsletter-land, even in the wake of their respective crashes. This shows that the focus is still on what worked in the publishing world – which drives a lot of retail behavior. What stands out is that retail investors have not even caught a whiff of the equity bug. To me, this is not 1999. My neighbors aren't even asking me about or even thinking about stocks. There's no fever yet.

As for news events affecting the market, I'm not concerned. In my opinion, the coronavirus headlines are too early to focus on, and an impeachment will be another media circus to boost ad revenue through click-bait but won't result in a removal from office. It likely bolsters Trump's claim to a second term. The Phase-1 trade is signed. Economic headwinds have died down.

The bull will keep on trucking, in my opinion. Volatility will likely spring up – perhaps right on my timeline of the next few weeks, but then I anticipate equities continuing their run. Companies are beating earnings, guiding higher and expanding margins. The environment remains an excellent backdrop for a sustained bull market.

Once our data shifts, as early as today, we will have an indication of when the sale might come. I am not buying into this local peak, but I fully expect it to be a lower peak than we will see throughout 2020.

The cool thing is this: the data tends to be right. Since we talked about a huge lift-off coming in stocks in October, 401(k)s have ballooned. Trump took his opportunity to take credit, tweeting, "STOCK MARKET AT ALL-TIME HIGH! HOW ARE YOUR 401K'S DOING? 70%, 80%, 90% up? Only 50% up! What are you doing wrong?"

The market is strong but should take a pause soon. I'm going to wait for new buys: I'm not getting sucked into a FOMO that's not even full force. You don't want to ask yourself: "what are you doing wrong?"

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.