I ran into a friend yesterday and talked. After discussing family and corona-life, we chatted about the economy and the market. We agreed that media comparisons to the Great Depression were not justified. Here are some key differences:

  • In the wake of the 1929 market crash, roughly 11,000 banks failed. In fact, Milton Friedman argued that the 1930s market crash didn't cause the depression. He felt that the banking system collapse was the culprit, which was caused by public panic making runs on banks. 
  • The 25% unemployment during the Great Depression may not compare with the COVID-19 crisis. Today, the typical household has two earners as opposed to one main breadwinner then.
  • The Smoot-Hawley Tariff Act of 1930 increased U.S. tariffs. That decreased international trade (especially farming), which helped spread the Great Depression worldwide. Today we have immensely accommodative monetary policy, low interest rates, and a flood of liquidity.

When it came to stocks, my friend said that the massive rally from March lows is a dead cat bounce. I said: "That's an awfully big dead cat bounce. We'd have to go all the way back to 2,200 on the S&P 500!" He gave me the duh look. As in: "Well – yeah?!"

I said that, while possible, my data didn't see that outcome. I mentioned how my data called the market trough on March 20 … missing by only one trading day. And how it predicted a massive rally. Then I told him that the Big Money Index is still rising. 

It's a great accurate market timing indicator. But like all things, it has its shortcomings. The Big Money Index (BMI) adds up all big money buy and sell signals and takes a 25-day moving average. If it is over 50%, buyers are in control. Over 80%, buying is unsustainable. Under 25%, selling is unsustainable.

Chart showing the performance of the Russell 2000 Index and the Big Money Index

The morning of March 19, the BMI dropped below 25% to oversold. This is when I said, "Get ready for a big bounce." The market did indeed bounce high, and so did the BMI – all the way to 60%!

Again, it's not due to many buy signals. In fact, big buying and selling counts basically just vanished … like a vacuum suck. Remember the 1991 movie "Backdraft"? Fire burns, then suddenly disappears into a vacuum. Then, Kaboom! Like it gathered energy for the next big pop! The same happened in the 2004 tsunami. The water receded away from the shore, getting sucked out to sea. Then the wrath came.

Here we are with big money activity sucked away to nearly nothing. What can we expect to come? Is this a dead cat bounce? Are we headed back to oblivion? Or may there be sunny skies ahead?

The Vacuum Study

I looked back at 30 years of my stock data. Over 7,635 days, each day averages 80 stock signals: 46 buys and 34 sells.

Buys/sells come from a larger stock pool showing big money trading. Buys or sells happen when high or low prices are violated. The average daily big money trades are 273 since 1990. That number has been rising due to exchange-traded funds (ETFs) and increasing trading volumes over time. For example, since 2005, the average daily big money trades are 445.

Big money trades are a way of seeing when something unusual and weird is going on in otherwise "normal" stocks. Starting with 5,500 stocks, around 1,400 can be traded by large institutional accounts without a big impact on them. For context, the average daily big money trades for the six months from September 2019 through February 2020 was 610. The average for March 2020 was 1,290 – more than double. Of big money stocks, 92% traded in a huge way in March. Large liquidations were likely occurring in March.

Once we troughed, the backdraft came. Volumes and signals were basically sucked away. The average daily big money trades for April fell from 1,290 to 380. I summarize all this in a table here:

Table showing big money buy and sell signals by month

So now we know big money trades and signals plummeted. This tends to happen after markets crash. Volumes are still large now (compared to a year ago), but they are nothing compared to the March lows. So, what should we expect moving forward? 

To get an idea, we'll look at a moving average of signals. That way we can know which way the big money is trending … up or down. We can identify how far away we are from average and then see if the market is trending up or down. This way, we can compare to prior times in the past 30 years.

Currently, the 20-day average of big money trades is trending down. Friday saw big money trades at 50% of the average but up from just 29% on April 15. The 20-day average is down. The market is obviously trending up.

I went back to see all time just like this: a vacuum of big money trades and signals, with an up-trending market. Out of 7,635 possible days, there were 127 instances like now. This happened only 1.7% of the time – it's rare.

What can we expect? While it's hard to expect much higher prices after a nearly 30% rally from lows, here's what we see: This data is saying that, when everything quiets, we can expect higher prices. The forward returns for the S&P are summarized below:

Table showing forward returns on S&P 500

Clearly, the forward gains are muted compared to the 30% bounce we've seen. But it also doesn't say to expect a big pullback either. Below you can see the 127 instances:

Chart showing performance of S&P 500 Index in situations similar to now

So, despite a BMI racing to 60%, low signal counts aren't necessarily bad. It indicates a market resetting and finding footing. Health care is clearly leading the way right now. Last week saw 21% of the health universe show buy signals. Many buys were in biotech.

Table showing big money buy and sell signals by sector

For now, quality stocks are taking over from the short-cover rally. Leaders should emerge and light the way as the market expects an economic restart perhaps sooner than sentiment does.

Emotion can let our fears and hopes wander as far as they like. But the story is in the data. Gustave Flaubert (1821-1880) said: "Le bon Dieu est dans le detail," meaning God is in the details. It later morphed to "The Devil is in the details." Either way, it is clear – everything is in the details.

If you have some time, you can read our white paper from late January, "Pump Up the Volume." In it, we break down big money trading and why January was showing signs of an overbought market.

The Bottom Line

We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see moments like these as areas to pick up great companies. 

Disclosure: The author holds no positions in any mentioned securities at the time of publication.