Did you ever notice that people like things predictable and repeatable? We love routines, and we love knowing what's coming. We don't generally like surprises – unless we know they are coming, like in horror flicks, which provide an oxymoronic predictable surprise.
Unsurprisingly, the same goes for our taste in music. And as much as we like to think we are evolving intellectually, apparently the further along we go, the simpler and more repetitive we like it, like it, like it. Colin Morris wrote a really cool (for us nerds) interactive article for digital publication The Pudding about repetition in music elegantly titled: "An Exercise In Language Compression: Are Pop Lyrics Getting More Repetitive?" It reads a bit like a scientific paper full of data.
He analyzed 15,000 songs that charted on the Billboard Hot 100 between 1958 and 2017. He applied an algorithm that compressed files you use daily into songs. The amount he could compress them became a measurement for repetition. This is because compression works by recognizing repetition and creating references and deleting the repetitive data to be reconstructed later. The size reduction is the repetition. Long story short, Morris found that, through the decades, songs became more repetitive. Look:
Now here's the fun part. He plotted all the songs on a bell curve (love those!). The purple are the most repetitive songs, the yellow the least:
But he did what many data scientists do: he excluded outliers. Watch when we include them:
Look how the whole curve shifts to the left! The outliers are so off the charts that scientists often exclude them because they skew results so much.
The king repetitive song is "Around the World" by Daft Punk. Here's an excerpt from lyrics.com:
I love outliers: the positive kind. And when it comes to financial markets, the biggest hits in the market also repeat year after year. That's the key to success ... repetition.
I say this because I usually look at sectors. Which lead? Which lag? That information is useful to see where the market is headed and what's leading it. The problem comes when everything is going up. All sectors get bought. Except for energy, that's what's happening now:
Those yellow boxes mean 25% or more of the sector is getting big money buy signals. Discretionary and materials were bought with only slightly less intensity.
So, when everything goes up, we need to focus on the outliers. Professor Hendrick Bessembinder asked if stocks outperform Treasury bills. He found they did over 100 years, but only 4% of stocks accounted for 100% of the gain above T-bills, while 1% of stocks account for 50% of the gains. In other words: the outlier stocks are where all the gains come from. This graph from his paper illustrates exactly what he's saying! And notice that most of the stocks peak at zero:
The professor showed that, if you're not in the 1%, you're never going to be in the 1%. So, if you spend all your time on finding the outlier stocks, you should be golden. Now if you wait for the outliers to repeat time and time again, you get big juice. This Mapsignals Outliers paper shows what happens. In short, if you had bought the most frequently occurring outlier stocks every six months and repeated this strategy, the results would have crushed the market.
Now that we've established that you must be in repeating outlier stocks, let's get back to sectors. I went back to my data on Mapsignals top 20 reports. These are the top 20 outlier stocks bought by big money each week. I went back from Jan. 1, 2019, and looked through the 1,160 stocks on the buy report. Almost 40% of the stocks have been tech:
So, it should come as no surprise that the returns year to date are so heavily lopsided to tech:
Here's the point: leading sectors show us where the leading stocks are. Outlier stocks are the leading stocks getting bought by big money. When they repeat over and over, it's a great winning recipe.
So back to that outlier chart above, here is where we want to live, because that's where the juice is:
I say: don't toss out the outliers; focus on them. And when they repeat like the most annoying earworms in the leading sector, get excited!
Finding success in music is stunningly like finding success in stocks. Look for repetition. Embrace it. Malcom Gladwell, author of the excellent "Outliers," said this about success: "Success is not a random act. It arises out of a predictable and powerful set of circumstances and opportunities."
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. Weak markets can offer sales on stocks if an investor is patient.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.