Check this out: researchers taught rats how to gamble. These rats learned to "play it safe," and they maximized their winnings. They were focused winner-rats. Guess what happened when researchers introduced flashing lights and sounds? The rats changed. They abandoned their conservative logic and went for high-risk, high-reward instead. You can read about that here.

The first thought that came to me wasn't Vegas – it was the market. You know I habitually trash CNBC, and I'm going to do it again now. Years ago, financial news looked bland and stuffy, with old dudes sometimes sporting bow-ties. Well nowadays, it looks more like a casino: flashing lights, buttons, loud noises, and sometimes utter nonsense.

Investing is like the strategic rat. But media, brokers, and tipsters prefer it like a casino. They want everyone to abandon logic and "go for it!" It's better for business. TV needs viewers to see their ads. Advertisers pay the networks based on viewers, and boring doesn't cut it. Brokers need you to trade. They need your commissions. Even the no-fee brokers need you to trade to sell your order flow to the highest bidder. The more you trade, the better they feel. They need risky-trader rats.

I know I'm a broken record, but I believe that the truth lies in the data. I measure the market based on big money moving in and out. The biggest investors buying and selling massive amounts of stock not only dictate where the market is, but where it's headed. That's why my day isn’t filled with TVs, ticker tapes, flashing lights, and buzzers. I gave that up years ago. And I have been way more focused ever since.

What the data says now is that buyers are plowing into risk. They are buying stocks at an exciting pace. Last week was an ordinarily slow holiday week – well, on the surface it was. But reality saw huge buying. We saw big accumulation in health care, financials, real estate, and consumer staples. Tech also saw nice buying along with industrials.

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

Health care continues to be the hottest sector going right now. I noted this uptick in health care buying in late October, and it has ripped ever since. Look at this chart showing Health Care Select Sector SPDR Fund (XLV) mapped against Mapsignals net buy and sell signals. More buying on a day means green bars. More selling means red bars. XLV rallied more than 8% since the uptick was noted.

Chart showing buy and sell signals in the health care sector

Last week, health care buying kept on trucking. We saw 118 buy signals. What's interesting is that most of this buying, 89 signals, came in biotech. That has been the theme of health care for the past month: big money loves biotech.

Table showing buy signals by subsector

Tech and financials also saw big buying last week. Those sectors continue their run higher: 

Chart showing buy and sell signals in the tech and financials sectors

But the real story lies under the surface. As you see in the little table above, software saw 55 buy signals. That buying was really split between tech and financials. Software stocks have been getting bought in style since the late September clobbering. This next chart shows when we see prolonged periods of software buying. The green is when buying is more than 1.5 times usual levels. It usually means higher prices ahead. This is mapped against the iShares Expanded Tech-Software Sector ETF (IGV).

Chart showing software buy signals and the performance of the software ETF (IGV)

So, as the pundits on TV debate impeachment, North Korean missile firings, Ebola, and the endless list of Democratic candidates, they paint an undertone of fear. They fuel the bearish view of the market. The data is quite different – it says that investors want stocks. They want them badly.

That's the good news. The bad news is that buying like this can't happen forever. The Mapsignals Big Money Index (BMI) lifted to 74.6%. This means that, over the past 25 days, 74.6% of all signals were buys. That's a kiss away from being "overheated" at 75%. That's when the needle is in the yellow. A BMI level of 80% is overbought, and that has a strong history of predicting pullbacks in the market.

Chart showing the performance of the Mapsignals Big Money Index and the Russell 2000

All this really means is proceed with caution. This is not the time to get caught up in the fervor and jump in. It means: don't become the rat drunk off noise and lights. That becomes a high-risk proposition. The time to buy was weeks ago. 

That said, if you're long, stay that way and perhaps look for areas to trim risk in the coming weeks. You may have a profit you're targeting to take or a trade that came back to flat. When the market becomes overbought, it is the time to reduce risk like that, but I just wouldn't be adding new risk right now. The market will likely pull back and offer a better entry.

Make no mistake though: I am still bullish on stocks. Rates are low, earnings are great, profits are high, and there is still boatloads of cash out there waiting. 

Be a smart rat: maximize your winnings. Because as W. C. Fields says: "The clever cat eats cheese and breathes down rat holes with baited breath."

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