Art confuses me. Complex drawings sell for fifty bucks, and blank canvases for tens of thousands. Case in point: at Art Basel in Miami last week, a banana duct-taped to the wall sold for $120,000. 

Artist Maurizio Cattelan's work "forces us to question how value is placed on material goods," according to the gallery owner. But the value literally went down the hatch when another performance artist ate what was likely history's most expensive banana. Cattelan was about to head to the airport when he heard about the banana's tragic end. Someone offered him a banana to cheer him up. Maurizio is the guy who made a $6 million 18-karat gold toilet. The loo was stolen from an English Palace last summer. Cattelan seems unlucky, as does the buyer of the $120,000 banana.

You can’t make this stuff up! Oh well … I find art tough because it's purely subjective. I know there are experts who can "accurately" value works of art: I have an art broker in the family. But when things are based on emotion, it seems virtually impossible to predict their value. Emotions are as unique as the individual. 

So why invest based on emotion or another investor's sentiment? Isn't the science of investing all about predicting future value accurately? Why do we hear about what traders feel in the market? 

I tried trading on my instinct for a month trading the USD/GBP currency pair in 2002. I lost 19 out of 21 trades. My boss at the time traded the opposite way and made a killing. It was such a disaster that I stopped trading for years … until I could create a data-based framework for making decisions. For me, data was the way forward. I started winning after basing investments on things like earnings, profits, debt levels, and big institutional buy and sell pressure. 

Dropping 120 grand for a banana on a wall makes no sense to me. Buying a company with a growing business making tons of money does. I can at least hope to predict its future trajectory. Who could predict the banana's value? I guess we could have predicted someone would have eaten it. 

When it comes to the market, all I do is focus on data. It allows us to create a picture going forward. Last week it showed something interesting. The big money buying is slowing down. The next chart just shows net buying to selling. When buying picks up, markets rise (the green arrows). When buying dries up, markets soon fall (red arrows). 

Chart showing the net buy and sell signals on the Russell 2000

This makes sense. Big money moving in and out of markets logically has an impact. The Big Money Index (BMI) has been falling. That means buying is slowing. This is after the index went over 75%: that's when it became overheated. I expect the market to pull back, as it can't go straight up forever. Everything needs to take a breath, and when buying becomes unsustainable, there's eventually no one left to buy from. Markets then correct and reset for the next phase of the bull market.

Make no mistake – we are in a bull market. I fully expect stocks to continue to rise, but the recent rally is losing steam. As the year winds down, volume typically dries up, which could partially explain it. So does being overheated. I would expect the market to pull back in the coming weeks.

We do have the January effect coming, which usually buoys stocks. If I had to guess, I would say that the second half of January or early February should see a market pullback. That just means I wouldn't add risk now. I am waiting for some discounts to appear. When the market goes on sale is the time to add risk. I fully expect the market to continue higher thereafter.

We can also see the buying slowing in the sectors. In the past few weeks, we have seen many yellow boxes in the following table. It shows total buying and selling on a sector level. The yellow is when more than 25% of the sector's stocks see buy/sell signals in a week. 

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

Last week, we saw only one: a continuation of the health care buying frenzy. I alerted you to when it began weeks ago. The Health Care Select Sector SPDR Fund (XLV) has rallied nearly 8% since.

Chart showing buy and sell signals in the health care sector

I expect health care to take a pause and pull back as well. This level of buying has become unsustainable, and the sector is now overbought. The light blue line shows the moving average of buying over 25 days. When it peaks above 10, the red line, health care is overbought. We expect a correction sometime thereafter. This level of buying is unprecedented, indicating that the presidential candidates are not posing a risk to health care.

Chart showing the performance of the Health Care Select Sector SPDR Fund (XLV) and buy signals

I'm not being an alarmist here. I am bullish on the market. Only now things are overheated, and I suspect that the market needs to vent. I believe it will happen in the coming weeks. The data says so. Using data to invest makes sense, but spending $120,000 on bananas doesn't. Sometimes markets don't make sense. Data helps us make sense of them. And sometimes a banana is just a banana.

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.

Investment Research Disclaimer