Talk about a longshot ... in 1923, a jockey named Frank Hayes suffered a heart attack and died in the middle of the race. His horse must have gotten freaked out and kept on going – so fast, in fact, that he won the race. Hayes was a winless jockey at that point, and the odds were 20-1 for a win.
Well, if horse racing isn't necessarily your thing, I am guessing markets are. Back in December, it seemed like you would have gotten better odds for a dead jockey winning the Kentucky Derby than a 20% market rally in under 12 weeks. But we live in strange times, and those who took the bet are smiling now. I won't strain to pat myself on the back, but while we were living on Planet of the Bears, my tone was lonely – but bullish.
The naysayers have piped down considerably in the past three months. But did you notice last week when the market fell under some pressure, the news headlines immediately hopped on the sour note? Headlines turned negative in an effort to seize eyeballs. When markets react and push further, it's natural to take notice. But when market slippage is met with immediate buying and lifted higher, we should also pay attention.
We have now spent 26 trading days with a ratio above 80%. Remember, this means that the 25-day moving average of counts of unusual institutional buying over selling is over 80%. The ratio had been declining but has now "caught itself." By this, I mean it stopped falling. And now buying is picking up again. This all started Monday, March 11. Looking at the table below, you can see in the green column of buying, for the March 6, 7 and 8, buyers went on vacation. Well, they came back and are pushing the market higher.
One Month of MAP Ratio
As you can see, the far-right column is the 25-day moving average of the daily measure of buying to selling. It has caught itself, and as buying resumes, we expect the ratio to start moving higher.
Now why do I care so much about this ratio of supposed institutional buyers over sellers? Well, I believe that so much of the market's behavior is dictated by what the big money is doing. Wall Street has forever been fixated on "what the smart money is doing" but has had little way of actually observing and measuring it. That's what makes this approach so unique. That's why I focus on this ratio – it can be an excellent guide for things to come, especially at market lows.
Don't just take my word for it – let's have a look into 30 years of market price behavior. The chart below, despite what you may initially think, is not a groovy '60s hippy chart. The trippy colors are actually telling us something about unusual institutional trading activity and its extremes.
Let's walk through this chart. The obvious is the S&P500 price plots for 30 years in the blue area. When we look above at the colored stripes, we should notice immediately that most of the time in the past 30 years was spent in yellow. The ratio is yellow when stock markets are idling naturally – for our purposes 50-70%. This means when buying is slightly more than selling. This is a healthy reading that indicates a market grinding higher and not at much risk of getting out in front of its skis.
What we should notice next are the green bands. These are readings of extreme buying, or periods of being overbought. Timing tops with the green bands is not always very conclusive, but typically, you can see that they line up with higher-trending market prices after periods of being overbought. (They don't often precede big drops.) That's what we see visually.
The most interesting correlation in this chart must be the red bands sitting at/near local troughs in the S&P 500. When we see red, which are periods of prolonged or unsustainable extreme selling, they line up very nicely with market bottoms. This gives further visual evidence that, on balance, when the market goes oversold, we can expect higher prices afterwards.
So right now, we are in a period of sustained extreme buying, which the above chart tells us, more times than not, we can expect bullish action. This is especially true in the wake of a big washout, the likes of which we saw in late 2018.
The best part about this for me is what we are observing in terms of what's being bought. Looking below, we see our index and sector returns since Christmas Eve 2018. Growth is leading the charge. The Russell 2000 and NASDAQ are each up roughly +23% since then. That's dead jockey performance!
But leading the growth charge last week was undoubtedly Information technology, which vaulted 4.9% for the week. And the info tech index is up 26.7% since Christmas. Energy, health, financials, materials, real estate and discretionary were all strong performers last week.
Defensive stuff has not performed nearly as well since the December lows. But when we look into lesser known indexes, we start to really see what's going up. The Russell 2000 Growth index is up 26.4% since Christmas. The Russell 3000 Growth index was up 3.1% last week alone (at the time of writing). But once again, there is a clear winner that is head and shoulders above everyone.
And that is semiconductors. The PHLX Semiconductor index this week alone is up 5.6%. Broadcom Inc.'s (AVGO) strong Friday performance is helping bolster the entire group, but look at the performance since December lows: the PHLX Semis Index is up an astonishing 30%.
What we see as the best part of putting unusual buying and selling into context is that the V-shaped recovery is real. This is not a rotation out of growth into defensive. It was a rotation out of growth, back into growth. We can see it now.
The above is evident on a per stock basis last week as well. Look at where the biggest buying was this past week so far with hardly any selling to speak of … info tech:
When consensus is pervasive and unidirectional, beware. The bears were out and saying it was over. But if you bet like you would have on a dead jockey winner in 1923, you would have found that consensus was very, very wrong. Sometimes, one voice can't be drowned out by the many if you can silence them out. Malala Yousafzai said, "When the whole world is silent, even one voice becomes powerful."
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. Buying has started to pick up compared with the week prior, suggesting that the near-term trend is bullish. Any pullback is a buying opportunity.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.