Big money matters. Chasing money dominates much of life. Love and purpose should be all we need, but the fact remains, they don't pay bills. Only money does.
So, it's unsurprising that rich people fascinate the masses. Forbes Magazine famously profiles the world's richest people each year. What may surprise you however, is it apparently didn't used to exclude criminals. Pablo Escobar made the Forbes list of international billionaires for seven years straight, from 1987 until 1993. In 1989, he was proclaimed the seventh-richest man in the world.
Here's my question: why are people fascinated by big money in magazines, but in stocks they'd rather focus on news? In short, stock news focuses on products, trends, and stories. Big money is conspicuously absent from headlines.
You may know by now – big money is all I focus on. Years ago, after handling an order to buy more than $600 million worth of stock, I saw firsthand what buying like that can do. The stock had terrible fundamentals and prospects, but it went straight up 70% in a month. That's because I was buying on behalf of a multi-billion-dollar money manager. That's when I began looking at stocks through the lens of big money players.
Especially in uncertain times like now, it's vital to look at what big money investors are doing with their money. I'll warn you: I am seeing some conflicting data.
Let’s start with buying and selling. Last week was a wild one for news. The first presidential debate was unconventional to say the least. Regardless, buyers came fast and hard. There was significant buying in discretionary and utilities stocks. Technology, industrials, health care, and materials stocks also saw decent buying.
Notable pain points were in communications and specifically energy stocks. They continue to feel the pressure from crude oil's slide: in August, West Texas Intermediate (WTI) crude was roughly $43 per barrel. On Friday, the price closed at $37.01 after a 4.3% slide. WTI is down 14% since August.
What I found most interesting is that Friday looked set to be a day of destruction in stock prices. President Donald Trump, the First Lady, and members of his cabinet tested positive for COVID-19. I wish them and anyone affected by this illness a swift and full recovery, but Wall Street steeled itself for a bloody day.
It's intuitive to think that, if a sitting president is diagnosed with the dangerous pandemic illness dominating our lives and hamstringing the economy, stocks would take an ugly beating. However, the fact is that it just wasn't that bad.
The Dow Jones Industrial Average (DJIA) was positive briefly intraday, and small-cap stocks finished the day up 0.53% for a stunning intraday range of +3.09%! The S&P 500 fell less than 1%. Only the NASDAQ made investors queasy with a -2.2% showing. It's important to note, however, that the NASDAQ's close on Friday was only slightly lower than Tuesday's close of 11,085.25 and 4.1% higher than the recent low posted on Sept. 23.
So, it would appear then that buyers are actually coming back, and what would be a fragile market if sellers had the helm was surprisingly resilient against dire news. The conflict in the data, however, is that we are in an election year. I recently pointed out that Septembers are typically rough for markets, but particularly so for election years. And sure enough, for much of September, sellers were in control. The S&P 500 fell 3.92%.
Now, what about October? Buyers seem to be returning, and it's our last full month before the presidential election. What can we expect? History suggests that last week's strength might be short lived, as Octobers in general are positive months on average, but election Octobers are anything but (going back 30 years):
October election years since 1990 are usually negative, with an average S&P 500 return of -2.45%. But instead of just looking at returns, let's focus on the big money. Below is the MAPsignals Big Money Index. It measures likely buying and selling of big money investors. Sellers are in control when the yellow line falls. If it rises, buyers lead. It has clearly been falling for well over a month:
However, that's what tends to happen leading up to election day. The following is the BMI plotted against every election since 1990. Regardless of the winner, we see the same pattern nearly every time! If you managed billions of dollars, you would likely want to bet on sure things. Big Money investors don't want to risk the unknown. Looking below, we see Big Money fleeing from stocks heading into an election and gobbling them up after the election. Each blue vertical line is election day:
So, what's to come for this election? We won't know until it’s over, but we see the theme of pre-election selling already underway:
The current setup is visibly similar to prior election years. What's happening now from a data standpoint is that big money is likely taking some chips off the table heading into the unknown. If history is any guide, the buyers will likely show up right around election day … usually shortly after.
When it comes to water-cooler talk, the Forbes richest list can provide plenty of ammo. But when it comes to stocks, big money is mysteriously absent from most discussion. While it may be unseen by most, I believe that it is the most important component of a market's future.
"What is seen must always be the outcome of much that is unseen." – H. A. Geurber
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.