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Last week's election news drowned out all else like a jet engine, and it was a huge week for U.S. stocks. Let's look at what happened filtering out news and noise, leaving only big money activity.
First and foremost, we start with the Big Money Index. This is a MAPsignals.com gauge of what big money accounts, like hedge funds and pension funds, are likely doing with their money. There is a detailed white paper called The Market Answer Key: Big Money. It discusses the power of how big institutional money really dictates market direction. One particularly fascinating part was that every election since 1992 saw big money managers selling stocks to reduce risk ahead of elections and then buying them after.
Below we see all election years including 2020 from the paper written in September. The yellow line represents the Big Money Index, while the blue line is election day. While it is not precise to the day, we notice a very clear pattern – big money investors sell stocks before the vote and buy them after. Once uncertainty is out of the way, risk can be taken with more conviction.
Now we see that the buying juice came on schedule this year – in fact, a couple of weeks before.
The important thing isn't so much that it played out according to my prediction (which it did), but more that we can clearly see the impact of big money. When big money acts, the market responds – not the other way around. That is why I think it's such a useful predictive indicator.
Big money bought stocks in a big way since election day. We think the stock market celebration was not over Biden's win but over the likelihood of a non-majority Senate. If that should (likely) come to pass, gridlock in Washington is Wall Street's friend. It can be "game-on" as usual.
Let's look at that buying another way. Below, we see all net stock signals. That means all buying and selling netted out daily. If there's a green bar, there's more buying. A red bar means more selling. There was clear selling (red bars) ahead of election day, and since Nov. 3, green bars.
Here's a zoom-in to make it clearer to see.
Here's where it gets interesting: it matters what big money is buying. What we can see is big money came to buy nearly everything, but not equally.
We see in yellow (more than 25% of stocks in the sector) huge buying in all sectors but real estate and energy. But what stands out to me is that growth sectors got snapped up while value underperformed. This is a bit of an unwind of the trade headed into the election: the cautious stance of favoring value over growth into the unknown.
Technology caught a big influx of capital. We saw 121 buy signals in tech. Most of the buying was in software (30 buys), semiconductors (27 buys), and internet/data stocks (30 buys). We also saw big buying in health care stocks: medical devices, biopharmaceuticals, and miscellaneous health care. There was also notable buying in industrials and financial stocks. The latter saw focused buying in insurance and bank stocks.
So far, the narrative is bullish. We have buying after an election in growth-dominated sectors. And when we add stellar earnings reports coming out right and left, it only adds to the bull case. But there's one last metric that could be the ignition of the rocket fuel for the stock market – exchange-traded funds (ETFs).
From Wednesday to Friday of last week, we observed 87 ETF buy signals. That's more than we've seen in the previous 20 trading days combined. Don't confuse this ETF buying with the extreme ETF buying we saw in June. We saw extreme buying in ETFs then, with 100 ETF buy signals on one day (June 5) followed by 90 on June 8. That was a blow-off top that prefaced a Russell 2000 pullback of more than 11%. The ETF buying we saw last week was more indicative of risk-on.
The calculation is simple: BMI+Growth+ETF = Juice. Big money bought stocks at large, focused in growth areas, and also ETFs. The election is over, and much uncertainty has been largely alleviated. Earnings are working. There is a path forward for COVID-19 and the economy. Risk is back on.
Regardless of the story, the BMI prefaced what was to come. The market has begun liftoff, and the fuse was lit on election day. The main story was who would become the next president, but there was much still happening out of the spotlight. It's time to put the chaos of uncertainty behind us and focus on prosperity and hope. The true story behind what drives markets and people eventually comes to light.
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.