The ARPANET was an early network designed to exchange information and ideas between universities. Not only did this become the technical foundation of the internet, it gave students access to share ideas with the brightest minds across the nation. So, what do you do with this kind of power? If you're a Stanford student in the early '70s, you buy marijuana. In 1971, a Stanford student used ARPANET to buy pot from an MIT student. So technically, the very first e-commerce transaction was a drug deal.

Naturally, that evolved into our now normal e-commerce. In 2018, consumers spent $517 billion online, accounting for nearly 15% of all retail sales. And we show no signs of slowing. We are moving ever forward into automation, e-communication, and digital life. And it's all powered by software. So logically, software should be attracting a lot of capital, right?

Well, wrong. At least according to recent stock market action. By now, you know that I follow big money, which was buying software stocks like crazy for much of the past year – until a few weeks ago. When my research firm MAPsignals sees stock signals, it's likely that the big money is moving in and out of stocks. It usually happens on roughly 2% of stocks each day.

So, what I saw last week was noteworthy. Friday was the biggest selling day in tech we have seen in six weeks. It caused tech to be unseated as the top sector, slipping to third behind utilities and industrials. 

Chart showing sector strength/weakness

More importantly, 82% of the tech sector's sell signals were in software – 31 of 38. But I believe there are great buys in software if you know where to look. Scanning 5,500 stocks, I found 267 companies with the word "software" in the sub-industry description; the average one-year sales growth is 34%, while three-year sales growth is 77%. The average one-year earnings growth is 36%.

My research method focuses on stocks with the best fundamentals attracting big money. Some big-time performers are currently looking a lot like babies getting thrown out with the bathwater. I suspect that, in the coming weeks and months, they will look like deals that could have been had.

Chart showing unusual institutional (UI) buy and sell signals by sector

In the chart above, we see big buying in utilities. This is defensive action as investors scramble for safety and yield with recent impeachment inquiry news. Interestingly, it looks like there was a rotation out of health care, as the sector saw its biggest day of selling since early August. We saw 39% of the health care universe log sell signals, and 65% of those sells were biotech companies. Managed health care also saw selling.

I suppose the fear is now that Elizabeth Warren gets the Democratic nomination. She has her eyes set on health care. I recall a similar scare a few years back when Hillary Clinton's campaign had negative comments on health care. Stocks got punished but climbed back over time. And as is usually the case, the great stocks bounced high and fast while the duds thudded.

Uncertainty breeds volatility. We should look at the CBOE Volatility Index (VIX) as a barometer of uncertainty opposed to fear. With less predictable outcomes, price action starts to go haywire. Volatility is certainly picking up: the VIX is climbing from September lows. But clearly, it could go much higher. 

Chart showing the performance of the CBOE Volatility Index (VIX)
Yahoo Finance

Any time we have the prospect of a rare event with unknown consequences, the market moves into "safety mode." The announcement of a formal impeachment inquiry will do that. Also, when we factor in that 70% of all daily stock-trading volume is institutional, things become clearer.

This Seeking Alpha article says that 80% of the market is algorithmic trading. So, when headlines cause rubbernecking, algos kick in. This is when things can get stretched to extremes. Again, keep in mind that it's likely not you and me selling stocks. Computers take hold and bend markets to their will. This happens until the last of the profits are squeezed. Then, we typically see a reversion as shorts race to cover. Is this normal chop or the start of turbulence? Only time will tell, but for now, we monitor.

The good news is that I suspect markets will continue higher. Europe is as messy as Boris Johnson's hair. China's growth is contracting. Latin America is as volatile as Trump's tweets. Remember Argentina's MERVAL index plunging 48% in a day on Aug. 12? U.S. domestic stocks offer the best place to invest. Oh, and the dividend yield on the S&P 500 beats Treasuries before tax!

Chart showing the yields on stocks and bonds, Yahoo Finance

I focus on finding the best stocks attracting big money. It's how to find market outliers that tend to outperform both up and down. Thankfully, outliers are always there. As for market volatility? The future is unknown; uncertainty is just natural. Theoretical physicist Brian Greene says: "Exploring the unknown requires tolerating uncertainty."

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.