I've been a jazz fan since the '80s. When I couldn't sleep, my mom bought me the Sony Dream Machine – an alarm clock with a "Sleep" button. You could listen to the radio for a set time, 30 or 60 minutes, and then it would turn off by itself.
I picked the most "boring" music I could find on Atlanta radio to help me sleep: jazz. Only, I laid awake hours listening. The music grabbed me forever. It was simultaneously lush and complex, harmonious and dissonant. I've been hooked ever since. I was a nine-year-old jazz guitar addict while my friends were air-guitaring Van Halen. I saw things differently.
It reminds me of this: the difference between rock and jazz guitarists – rock guitarists play three chords in front of 30,000 people. Jazz guitarists play 30,000 chords in front of three people.
I'm also addicted to stocks. But keeping with tradition, I see those different than most too. I grew up in the '80s hearing of fortunes in the stock market. There were hot tips and free advice everywhere. Naturally, making money was never as simple as "buy low, sell high." I ended up on Wall Street and learned that even professionals found the market baffling. It was clear: market success was more about who you knew as opposed to what you knew. I thought I'd never figure it out.
That all changed when I was asked by a big London trader to make sure he knew about every huge trade in the market. I couldn't monitor thousands of stocks myself, so I programmed a computer to do it for me. I started to see how big trades could move markets. Then I got to handle monstrous orders for stocks and saw first-hand the impact of big players in the market.
That's how I "read" the market – based on what the big money is doing. It allowed me to say the market was overbought in January. It allowed me to predict a pullback in February and March. It allowed me to call oversold conditions and a market trough almost to the day. I realized long ago that big money dictates markets. So let's see what it's saying now.
The Big Money Index (BMI) is Mapsignals' market indicator. It tracks the unusual buying and selling of big investors in stocks. It measures the 25-day moving average to smooth out the noise. Levels of 80% and above are overbought and indicate that a fall is near. Levels of 25% and below are oversold, indicating that a rise is highly likely, just like in March.
The BMI led me to predict a market trough for Friday, March 20 – it happened Monday, March 23. The BMI went oversold on March 18 and troughed at 9% on March 27. It has been rocketing ever since. In fact, It shot up to over 76% last week. That's just inside the overheated level of 75%.
The only data changing is that volumes are increasing. That means more stocks are trading above their average volumes recently. March volumes exploded. One component of a buy signal is a breakout on bigger volume than other time frames. Each day we get further from the March volume peak makes signals easier to attain.
The big thing to know is that the BMI is likely to signal overbought this week:
To take it a step further, check out the following chart. It shows the daily net of buys and sells. Green bars = more buys; red bars = more sells. The amount of buying is very small compared to prior months. The rip higher in stocks is due to sellers disappearing … not big buyers.
This is usually what happens after a reset. Again, last month's huge rally was because sellers vanished and only a few buys showed up. As we approach overbought, know that it is technical. It's not FOMO-based.
Sectors are also good indicators of near overbought or oversold. Health care (specifically biotech) seems like it would be overbought – but is it?
Below, you can see that buying is very low for the sector but recently rising. The selling from March has fallen to zero. It means health care is nowhere near overbought. The red line is tracking sells – if it's rising, selling is gaining. Clearly, selling has fallen to zero. The green line is tracking buys – if it's rising, the rate of buying is increasing. You can see that buying is lifting from zero.
Let's now look at tech, the next strongest sector. Is it overbought?
Thematically, COVID-19 names are still finding their footing. Stocks like The Walt Disney Company (DIS), Starbucks Corporation (SBUX), Expedia Group, Inc. (EXPE), Booking Holdings Inc. (BKNG), and NIKE, Inc. (NKE) are all trading better than prior weeks. If anything, it seems as though the market is looking past this summer and into the backend of the year.
The news is bad, but a lot of focus is on reopening. Many don't believe in this market rally. But here's the bottom line according to data: the BMI is overheated, sector positioning says the big sellers have disappeared, and earnings reactions have been okay.
Looking at where the buying is coming from, it's in two places – tech and health care. Both of these are signaling gains to come in the medium term.
When the market didn't make sense to me, data led the way to clarity. It was like someone gave me sight after years of blindness. Just like Mary Ann Franco. She lost her sight in a car accident in 1993. All she could see was blackness ever since, until 22 years later when she fell and hit her head. Her vision suddenly returned, confounding doctors.
It's all about what we see … Helen Keller said: "The only thing worse than being blind is having sight but no vision."
The Bottom Line
We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see moments like these as areas to pick up great companies.
Disclosure: At the time of publication, the author holds long positions Disney, Starbucks, Expedia Group, Booking Holdings, and NIKE, but no positions in any other mentioned securities.