Nature is full of deception. Blue jays mimic the sound of hawks. They do it near bird feeders to scare off the natural prey of hawks who would otherwise eat from the feeder. That leaves the blue jay all alone to feast. Clever, eh? Well, beware of market deception too.

Last week, several of my industry contacts called the near-term bottom for stocks. Thursday, I had a chat about whether a bottom was in or not. The broad indexes rallied, particularly the Nasdaq 100 exchange-traded fund (ETF), the Invesco QQQ Trust (QQQ). Many thought we were out of the woods, but I learned long ago to wait until I have all information to make a judgement.

I wanted to weigh in on the argument but didn't have the full picture. Yet, the nature of Wall Street is immediate. My data doesn't calculate until the wee hours of the morning after the market closes. Why?

The models need to measure every traded share of stock reported to the tape. The law says that, if shares change hands, they must be reported. But data doesn't always come in at the same time. The 4:15 pm volume published may change the next day. There are many reasons for this, which are worth another discussion, but just know that I wait for all shares to print.

So, my models run at 3:00 am while I am dreaming. Then I aggregate it all on the weekend, when the picture snaps into focus and I can analyze. Sometimes data is glaringly different one day to the next, but it's infrequent.

So once the trading day finished on Thursday, I revisited the chat about the market having successfully retested near-term lows and then headed higher. I noted that intraday the QQQ rallied as high as +1.56% but only closed +0.37%. That means they (the collective market) sold much of the rally away and on above-average volume. I noted that it didn't scream strength to me.

Then Friday gave us a fat rally. I looked wrong, but was I? Here's why I think we may have more volatility ahead: the data says so.

Here's the caveat: if I'm wrong and the market rises, then everyone's happy, exccept the big bears. If I'm right, it provides an even better buying opportunity. Again, I like to have the odds in my favor.

Let’s look at the data. First, despite the rosy end to the week for stocks, my data still shows big money selling. When markets reverse upward, I like to see buy signals. Last week saw the opposite. No real buyers were anywhere. We can see that with the weekly total: 437 Big Money Sells and only 53 Big Money Buys.

I also like to see sector leadership from a market bottom. Nothing is clearly emerging yet. The best I can say is tech did not see major pressure: not a confidence builder for a renewed bull.

Selling was dominant in the following sectors: staples, health care, communications, financials, utilities, real estate, and especially energy. When 25% or more of the sector universe is bought or sold, it goes yellow. That's our data saying "Look here! Something is happening in this sector!" Notice how the yellow is only in the sell column?

Table showing big money buy and sell signals by sector 

You may say: "But the SPDR S&P 500 ETF Trust (SPY) rallied 1.89% from Wednesday's closing low and 2% from the intraday Wednesday low!" Let's examine that. There's volume and then there's volume – meaning there are different ways to display volume. I downloaded the following SPY data from Yahoo Finance:

Table showing the daily performance of the SPDR S&P 500 ETF Trust (SPY), Yahoo Finance

Looking at the screenshot below, one might think: "Friday's rally was above average volume – a clear sign of real buying!" And you would be sort of right.

Yahoo! Finance data page for the SPDR S&P 500 ETF Trust (SPY)
Yahoo Finance

It turns out that Yahoo Finance calculates average volume using 63 trading days worth of data. There are generally 252 trading days per year (no weekends or exchange holidays) – 63 over 252 is precisely 25%. Therefore Yahoo uses three-month average daily volume, or 68,877,203 shares per day in this case.

It is far more common for traders to use recent events to make their calculations. We use a 20-day average, which is 85,473,355 shares. So, Friday according to Yahoo was above average volume, but according to MAPsignals, it was below average volume. 

I also look at volume with Big Money Signals. To summarize, my data monitors 5,500 stocks daily, ranking each for strength and weakness measuring fundamentals and technicals. Then it overlays a filter looking for unusually large volume and volatility.

When big money moves into and out of stocks in an unusual way, it sends a flag. The five-year average daily big money signal (yellow flag) is 561. Those signals can be further narrowed down into when there's likely huge buying on higher prices or selling on lower prices. That happens on only about 100 stocks per day.

Image of MAPsignals process

Let's look at a more detailed table of SPY, now with some highlighted information:

Table showing big money buy and sell signals on the SPDR S&P 500 ETF Trust (SPY), FactSet

Notice that down days are above 20-day average volume, and down and flat days are above average Big Money Signals. Up days are below average. Only two days have above average signals: +1.02% and +0.27%.

The bottom line is that my data tells me we might not have seen the bottom yet. Election volatility is still on the horizon, and big money activity is higher on down days than up days. That points to potentially better entry prices ahead.

I try to avoid opinions in investing – that can be dangerous. I stick with data. Leonardo Davinci said: "The greatest deception men suffer from is their own opinions."

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 the securities mentioned at the time of publication.