I know a thing or two, because I've seen a thing or two.
Earlier this week, I discussed Colonel Phillip J. Corso. He served on President Eisenhower's National Security Council and later headed the Pentagon's Foreign Technology desk. He had a decorated career, but what makes him interesting is his 1997 book, "The Day After Roswell."
In the book, Corso claimed to have overseen the recovery of extraterrestrial artifacts from a UFO crash near Roswell, New Mexico, in 1947. He alleged that the CIA and military intelligence reverse-engineered the alien technology. Scientists then used that information to develop accelerated particle-beam devices, fiber optics, lasers, Kevlar, and integrated circuits.
One would think when a National Security Advisor to President Eisenhower tells the world he spearheaded alien technology recovery, everyone would know about it. But this was an instance where it required digging to find his story.
When I looked at market action this past week, I thought I would know what was going on right away. But something looked really strange. It didn't make sense, and I needed some outside counsel.
After nearly 20 years on Wall Street, I've made a contact or two ... so I made some calls to see what I could find out. I reached out to a multi-billion-dollar money manager, a head-trader at a multi-billion dollar fund, and a portfolio manager and researcher.
I'm going to tell you what I found out, but you need to know a few things first:
- You need a little backdrop of market action last week.
- You need to know what my system's data said.
- You need to know that you won't find this story in any financial news media, or anywhere else.
The market averages this past week were not very exciting. The Dow Jones Industrial Average, S&P 500, and NASDAQ were all down slightly – somewhere between -0.25% and -0.45%. There was one notable exception: the Russell 2000 Index. It popped more than +1% this week.
Right away, I thought that it must be from the Russell realignment. The Russell 2000 Index is designed to reflect the ever-changing U.S. stock market. So, every year the index has an "annual reconstitution process." This is an adjustment or realignment to maintain an accurate representation of the market. Breakpoints between large, mid, and small caps are redefined. Adjustments start in May, when all the companies are ranked,
Then in June, the new portfolio is communicated to the marketplace. "Beginning on June 7, preliminary lists are communicated to the marketplace and updates are provided on June 14, 21, and 28. The newly reconstituted indexes take effect after the market close on June 28." That was Friday.
The small-cap-heavy Russell 2000 Index was up last week, but S&P Growth indexes were down. That's counterintuitive since the Russell 2000 is full of growth companies. While that is weird, the most notable outliers last week were that semiconductors screamed higher (+3.4%) while utilities and real estate investment trusts (REITs) plummeted (-2.12% and -2.73%, respectively). Why is that strange?
The yield on the 10-Year Note fell to 2% by Friday's close, even trading lower during the week. That means the market sees interest rate cuts coming. So, if rates are headed lower, investors would want to buy stocks that have higher yields. Those are typically REITs and utilities – the two worst performers last week.
Then I checked the data. It echoed what we see in that index performance table above, but there was a loud and clear signal in REITs. It was selling. We look at 5,500 stocks every day, but only roughly 1,400 on average can be traded by big institutional investors without making a huge impact on price. Looking below, you can see that 93 of those "institutionally tradable" stocks are in real estate.
Then, look to the right. Last week saw 45 sell signals. That means just about half the real estate universe was sold. Wednesday was the largest selling day for REITs in 2019, with 30% of our universe logging an unusual institutional (UI) sell.
Now I had to get on the horn to find out what insiders thought. The first couple of phone calls were surprising. My contacts noticed but didn't necessarily have a reason. After we talked it through, here was the consensus from my industry friends.
REITs and utilities got pounded in a "sell the news" situation. Why? These groups have been the ones being bought by smart money for a while now in anticipation of a rate cut. That expectation is now fully priced into higher-yield stocks as Main Street investors think it's now time to buy REITs. That's when smart money sells longs made months ago to everyone else.
Here's the real question: "Is this bullish or bearish for the market?" Rates are likely headed lower. There is a smart money rotation out of higher-yield safer stocks into small-cap stocks. The 10-Year Note's yield is 2.00% before taxes, versus the S&P 500 dividend yield of 1.88%. Looking at the chart below, we see that, after taxes (bonds taxed at ordinary income and dividends are taxed at long-term capital gains rates), investors end up with more money in their pocket.
Weak economic data released last week suggests even more pressure to get a trade deal done. I believe that this is all very bullish for U.S. stocks.
Summer may bring more volatility, but don't lose sight of the big picture. Like Simon Sinek said: "The big picture doesn't just come from the distance; it also comes from time."
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. We expect unusual buying in stocks to gain in the coming weeks.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.