The early bird catches the worm. John Ray has the earliest documented use of it in a 1670 book of English proverbs. But some 300 years later, British broadcaster Jeremy Paxman wisely said: "The early bird may get the worm, but it's the second mouse that gets the cheese."
Being timely is one thing, but being clever is better. Take Aberdeen seagulls for example. They don't need punctuality in the rainy northeastern Scottish city. These bright birds mimic rain by tapping their feet on the ground. It makes vibrations similar to those caused by rain. Unsuspecting worms come up to the surface believing it is raining. Presto: effortless snacks arrive at will.
How might this relate to stock investing? I won't sugarcoat it: it's tough to make a market call right now. On one hand, we have dread-filled headlines – sadly, nothing new. But election uncertainty looms like a fast-approaching angry cloud as my young son used to say. I've already well-documented big money patterns during election years. We previously saw that self-fulfill in September with sellers in firm control.
On the other hand, we have the only thing I have come to trust in analyzing markets and stocks: ongoing big money data. Currently, the two are in a bit of a conflict, making looking forward a little tougher. But in the end, I have to go with the cold and emotionless ones and zeros of hard data. And that data says that the buyers are back. That may not fit the expected game plan of a post-election bump, but then again – the early bird catches the worm …
Every election year since our data began in 1990 exhibited a clear pattern: big money sells ahead of uncertain elections and buys thereafter. This year looked to be setting up the same way, but recent buying has appeared. And it's shifting the tides. Below is the Big Money Index:
But there's buying, and there's buying. By that I mean: we can see big money plowing into previously unloved stocks as a safe haven. Big money investors might run and buy utilities, staples, communications, or high-dividend stocks: safety plays. Money managers that earn fees on capital deployed and not sitting in cash will chase the safest investable corners ahead of uncertainty.
But that's not what I'm seeing here. I see juice. First let's look at which sectors are attracting recent capital – it's almost all of them.
Big money buying is here noticeably in technology, discretionary, financials, materials, industrials, and healthcare. The "defensive" sectors like staples, real estate, and communications saw noticeably less buying.
Utilities is an interesting anomaly with significant buying last week, but don't forget: the universe is small. I look at sectors on the basis of how many stocks can be easily traded by big institutions without affecting the prices significantly. Utilities is the second smallest universe at 43 stocks behind only communications.
The last interesting thing to note here is that energy, while not seeing huge buy signals, is not seeing huge sell signals. The absence of sell signals on the most hated sector of the past few months is in itself bullish – or at least a conspicuous absence.
Next I'd like to go into which stocks are floating to the top of the rankings. MAPsignals ranks all 5,500 stocks it looks at in terms of strongest to weakest. It factors fundamentals like sales and earnings growth, profit margins, and debt levels while also looking at the technical strength of how stocks are recently trading. Once all stocks are graded, it looks for big money buying, which reduces the pool of 5,500 to about 100 per day. By looking at the top-ranked stocks being bought, we can see what leadership is emerging at market pivot points.
The seismic shift in buying is clear over the past week or so, and it's not defensive stuff. The juice names are catching the attention of big money. That is a very bullish sign. The top 20 stocks of big money buying are often where we can find tomorrow's winners. This is an analysis of my highest-ranked 20 stocks seeing big money buying for the week of Oct. 5 through Oct. 9 out of a pool of 318 last week (removing duplicates from 561 stocks):
What's fascinating is that the top 20 stocks boasted the following average metrics:
- One-year sales growth of 35%
- Three-year sales growth rate of 38%
- One-year earnings growth rate of 71%
- Three-year earnings growth rate of 37%
- Profit margin of 16%
The picture that is emerging is this:
- Buyers are back, and they are buying top-quality stocks.
- This is an offensive not defensive action.
- Election uncertainty is becoming less of a hurdle for big money, or better yet, they think they know who will win. (I don't know whom … )
- The mid-earnings season shopping spree shows us that earnings are working, and big money expects them to continue. Sometimes great stocks can report great numbers and guidance but get sold if the trend is not expected to continue. That's not what we're seeing here.
Past performance is not necessarily indicative of future results. The same can be said for big money election data. In several past election years, buying occurred just after the election, but this year it seems to be coming early – at least for now. Tomorrow may bring different data, but the trend is reversing higher.
One final warning to watch out for before "all-clear" is that volumes are lower on up days and higher on down days.
Here's the SPDR S&P 500 ETF Trust (SPY):
Notice the same trend of lower-volume up days on the Invesco QQQ Trust (QQQ):
But notice the iShares Russell 2000 ETF (IWM):
This means that small caps are catching a bid, and we see it with relative outperformance recently. This is another bullish item to add to our list. In a big bull market, you want big-volume up days and light-volume down days. This is just something to keep an eye on.
There's good stuff going on data-wise. Don't worry about being early; it's better to be the second mouse than the first.
The Bottom Line
We (MAPsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies.
Disclosure: The author holds no positions in the securities mentioned at the time of publication.