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The election is over, but the big news is that a vaccine is getting closer. I suspect that even some anti-vaxxers might make an exception this time. The reality is that vaccines work, preventing 2.5 million-plus deaths yearly.
Whether you are happy or sad, the 2020 presidential election is over. Lawsuits may alter the outcome, but the odds of that dwindle each passing day. I don't care much for politics – I care about big money stock data. And once again, big money somehow knows beforehand how markets behave. In the white paper, The Market Answer Key: Big Money, we discussed the Big Money Index and devoted a section to election years. We found that, each election year, big money sold before and bought after the vote.
Like clockwork, the 2020 pattern repeated itself, with buying slightly ahead of election day:
Markets hate uncertainty, and there is less now with the election behind us. But then, on Monday, Nov. 9, stocks woke up to news of promising COVID-19 vaccine results from Pfizer Inc. (PFE) and BioNTech SE (BNTX). All stocks looked set to benefit. But as the day unfolded, a massive rotation emerged.
Growth got hammered, while value and small caps juiced higher. All the unloved stocks since COVID began – energy, transport, and financials – were suddenly on fire. And by the close, "stay at home" stocks were dumped. It was a huge rotation out of growth and into value stocks.
The Big Money Index (BMI) is a 25-day moving average of netted stock buy and sell signals. More buying causes the BMI to rise like we see now. In our model, stocks must display huge trading to become a buy or sell signal candidate. I monitor 5,500 stocks. Only a handful trade unusually big each day.
Those stocks that "trip" the model (trade on increased volumes) average 497 stocks daily over the past 10 years. Out of those, an average 66 are buy signals, and 34 are sell signals. So, from 5,500 stocks, only 9% trip the model as big money signals, and only 20% of those become a buy or sell. Visualize it like this:
When markets meander along normally, my analysis focuses on buy and sells. They tell us sectors and stocks that big money traffics in. But when big rotations happen, useful information is hidden in which stocks trip the model: the yellow flag stocks. Monday saw 3x normal model trips, and Tuesday saw 2.4x normal. Counts dwindled as the week progressed:
This is important because we see rotation in terms of big money. If growth stocks had such a bad week, why don't we see it in a rising BMI?
The Big Money Index measures buying vs. selling in all stocks. Growth stocks have led the market higher for months. When they get sold, it takes a lot to generate big money sell signals.
There are few sell signals, and buy signals were off the charts. Every sector was yellow (more than 25% of the universe bought). In all cases, buying was nearly double or more for the week:
Technology stocks logged the most trips (outsized trading) of any sector. In the tech sector, 534 stocks flagged yellow, but only 96 were buys. Huge volumes traded in tech stocks, yet most weren't buy signals, meaning heavy volume likely was distribution.
Another way to see sector dispersion is looking at buying velocity. A rising green line means that buying is increasing. A rising red line means increasing selling.
As noted, tech and growth are the main weakness in this rotation. Notice below how tech buying isn't falling? This is because some small-cap tech stocks are heading higher while some of the larger ones are falling:
Now, let's compare with the rate of selling:
The point is that pain in growth and tech isn't alarming – only giving back gains after a long rise. But we do see a sudden buying uptick in previously unloved sectors:
Real estate sector
Discretionary, some health care, industrials, and materials are also seeing buying. Their rising green lines will appear in the coming days.
I believe that jumping on this rotation is premature. Pfizer's potential vaccine ignited value. However, the vaccine isn't even FDA-approved yet. And the drug is a logistical nightmare, needing to storage at -70 Celsius. Most medical facilities aren't equipped for that, at least not at scale. Lastly, the vaccine must be administered in at least two or three stages for each patient.
So, even if it was rushed through approval and somehow widely distributed on the fastest schedule imaginable, the general public won't have it any time soon. The more likely scenario is another lockdown, with cases and hospitalizations surging countrywide. That means all of the suddenly loved stocks like airlines, travel, energy, and financials still won't make any more money for at least a few quarters.
Folks, this big rotation is premature. It also screams of hedge funds scrambling to cover their long-growth, short-value positions.
Will you suddenly stop working remotely or using cloud storage? I doubt it. I'd argue our reliance on these services will intensify after this pandemic. So once reality sets in, tech and growth stocks will quickly come back in vogue.
So, when a sudden stock market rotation rocks tech and growth, you must remind yourself that they are companies, not just tickers. They're businesses that grow earnings through higher revenue and profits – a winning formula regardless of their industry.
Buying great businesses that make a lot of money is the long-term recipe for success. Investors rushing into embattled sectors like energy, financials, and transport clearly forgot this or were forced into them. And if investors are forced to dump great stocks, should you be running away or looking for discounts?
The bottom line is this: Money is rushing back into stocks. The growth/value rotation is a knee-jerk reaction to vaccine news. It is causing pain in leveraged hedge funds caught wrong-way exacerbating the spread. Growth stocks will continue to power higher markets. For now, they are caught in a quake and getting sold. It could last days or months. No one knows. But I am certain that high-quality growth stocks are long-run winners.
"In the long run, men hit only what they aim at. Therefore, they had better aim at something high." – Henry David Thoreau
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 any securities mentioned at the time of publication.