We usually trust big institutions to make smart choices. You know, things like governments. We place immense trust in them "knowing what they’re doing." But just because you're big and in control doesn't mean you're smart. Take this: since 1950, there have been 32 U.S. accidents with nuclear weapons. And six of these "oh-no's" resulted in loss, or weapons that can't be accounted for. The former USSR lost 41 of them. Oops.

I believe that big money dictates markets. That's because 30-plus years of data says so. But that doesn't mean big money buying is always smart money buying. More on that in a moment.

First, we have to talk about something: the buying was huge last week. Like, YUGE. Out of the eleven sectors, nine saw buying in more than 25% of the universe. This means that, if a sector has 100 stocks, at least 25 stocks made buy signals during the week. Telecom is the smallest sector, so let's leave that one out for now.

The table below says it all. The yellow boxes are when more than 25% of the universe logged buys. 

Chart showing buy and sell signals by sector

One level down, we saw notable buy signals in the following Industries:

  • Semiconductors and semiconductor equipment
  • Biotechnology
  • Banks
  • Metals and mining
  • Capital markets
  • Pharmaceuticals
  • Oil, gas, and consumable fuels
  • Machinery

There was one significant sell area. Real estate investment trusts (REITs) took it on the chin. The biggest selling was equity REITs. But aside from that, it was all big buying. 

Buying is great; it moves markets higher. That's what we all want. But too much buying is like a party getting out of control. The cops eventually show up.

When the cops show up, we would expect the market to come back to earth a little bit. Our data indicates that a pullback is near. It's important that you know this: I don't think a crash is coming. I think the markets will correct, or revert to the mean a bit. This is necessary and healthy to resume the broader bull market path. If you ask me how far along are we in the bull market, we're closer to the end than the start. That said, just because a baseball game is supposed to be nine innings doesn't mean they don't go to extra innings. Some games have lasted days.

So, if the market pullback is close, I'm sure you want to know: When is it coming, and how bad will it be? Our answer might be in the buying habits of big money. This brings us back to the lost nukes. Just because you're large and in charge doesn't mean you’re smart.

Something mega happened last week that popped our eyes open. Exchange-traded fund (ETF) buying was off the charts. We saw an immense number of buy signals on Thursday and Friday: 73 and 53, respectively. Let's put those numbers into context: going back to Jan. 1, 2010 (about 2,500 trading days), the daily average ETF buy signal count is 6.5. So, we're talking about 10 times the average buying. Yeah, that big.

We wanted to know what this means for stocks in the coming weeks. We went back and looked at similar instances of ETF big money buying. We looked at days of over 60 buy signals and found 7 out of 2,500. It's a rare thing, but it almost happened twice last week.

So, when monstrous ETF buying happens, what comes next? The following table shows us that a sell-off will likely follow. The averages of the events suggest the near-term market high will come within five trading sessions for an average +1.92% gain.

What happens after monstrous ETF buying?

Table showing performance after ETF buy signals

Performance of S&P 500 after huge ETF buying

Performance of the S&P 500 vs. ETF UI signals

Performance of S&P 500 after ETF UI signals

Chart showing unusual institutional signals and the performance of the S&P 500

The downside, however, will likely be more than three times larger. The average loss from days of extreme ETF buying is -6.38%. And we could expect it to come within the next 27 trading days. That's just about six weeks from now accounting for holidays like Christmas and New Year's Day. 

That's interesting given that, earlier last week, I wrote, "gun to my head, I foresee a market sell-off the second half of January." That allows for the January effect of new money being deployed in the market typically the first days of the year. Note: in the table above, the least amount of trading days to the low was 14. That translates to about three calendar weeks.  

I don't want to be a Grinch here, but the market is drawing closer and closer to becoming overbought. When our data shows a market overbought, you can generally set your watches to it that a pullback is around the corner. 

What that means for you is this: don't add risk now. Look to take profits or lighten positions in trades you feel are mature. Long-term core longs should remain in place, as again: I believe a pullback is near, not the end of the bull market. Pullbacks are buying opportunities.

As we head toward the holidays, know that the prospects for the market are still bright. But like a baby, it needs to burp. It'll likely give back some of these well enjoyed gains. The big money is telling us that.

And remember, don't confuse big with smart. Joe Wiesenthal made a perfect comment when Annie Liebowitz faced down a $24 million debt. "Just because you're rich, doesn't mean you’re smart." Case in point: in 1987, Liebowitz was offered a fat American Express ad campaign. But her own application for an Amex card was denied several times. Interesting.  

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