Once upon a time, stocks were reserved for those with money. And the big traders – or "operators" as they were known – were the big movers of the market. The big operators could dictate markets up or down.

Perhaps the most studied operator was Jesse Livermore. He was the inspiration for "Reminiscences of a Stock Operator" by Edwin Lefèvre. If you're a stock buff and have never read the book, you should. It's a fascinating guide to the psychological aspect of speculating on stock prices.

But it's filled with lessons that reveal how the biggest operator of them all had deep respect for patience, which in our modern vernacular equates to investing. He repeated over and over in the book that he made his money not by trading, but by holding.

Also, several times in the book, the main character reveals that size is the key to the market. He would often do small test trades to see if the market could absorb his order. For instance, if he suspected that a market was primed for weakness, he would send in a small buy order. If it was sold immediately, he would then test a small sell. If it was difficult to find a bid, then he knew … it was time to pounce. He would sell big size and essentially crack a market and commence a major move downward.

It was partially due to this technique that he was able to short sell into the crash of 1929. He netted $100 million – the equivalent of $1.5 billion in today's dollars. That's a perfect illustration of understanding the power of big money and which way it's flowing. I have read and reread this book many times and have taken some valuable lessons from it. I even coded some of those lessons into my system, which identifies when big money is moving in and out of stocks. It helps identify, from the top down, how big money moves markets.

On a top level, the Big Money Index sums all big money buying and selling and plots a 25-day moving average. When it goes below 25%, that means only one-quarter of all signals are buys and the market is oversold. That allowed me to identify buying opportunities in December 2018 and in March 2020.

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

One level deeper, we can look at exchange-traded funds (ETFs) as a barometer for all equities.  When big money moves in and out of ETFs, things happen. Here we can see a correlation between big buying in ETFs and near-term peaks.

But it's not nearly as convincing as when there is big ETF selling. Look how it perfectly lines up with troughs. When big money is flushing out of everything, bottoms are often near, and soon no sellers will be left. Markets typically vault higher shortly thereafter – again, just like December 2018 and March 2020:

Chart showing the Mapsignals Big Money ETF Index and the S&P 500 Index

As we dig deeper, we can see which sectors are collecting big money. Here we see a weekly table of big money buys and sells. We can see that selling is virtually nowhere to be found. Buying is alive and well, however. And it is especially alive and well in materials, industrials, communications, and discretionary stocks.

The trend for months has been monster buying in technology and health care. Now we see the rotation underway as tech and health care are both seeing signs of selling for the first time in months. While not significant, the selling in those sectors visually jumps out. This is a stark contrast to the months leading up until now. 

Table showing big money buy and sell signals by sector

The final level I look for is big money moving in and out of individual stocks. That's what allows me to isolate what I call the "outliers." Statistically speaking, an outlier is a deviation from the norm. Normally, that's not always a good thing. But when it comes to the markets, it helps me find the LeBron Jameses and Wayne Gretzkys of stocks. Outlier stocks are the best – the ones that keep going up year after year, defying the average odds of stocks as a whole.

I can't get into too much detail here on which particular stocks are appearing on my radar today, but I will tell you they all have some things in common. They grow sales and earnings over years. They have fat profit margins. They have little to no debt. They lead in the industry they are in. And most importantly, big money flocks to them.

Jesse Livermore knew the power of being on the right side of big money. He also learned that being patient is what made him his big money. That's the recipe: find outlier stocks that big money loves. Buy them. Then sit and wait.

Livermore knew it all too well. He said, "It never was my thinking that made me the big money for me. It always was my sitting."

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.