Fear as far as the eye can see, but the market doesn’t care…
Amazing desert scenery is the stuff of dreamy cinema. Blistering sun roasts an endless ocean of sand. Wavy light distortions become a mirage of an oasis, before it vanishes. Exotic sandy dunes conjure classics like "Lawrence of Arabia," "The English Patient," and "Ishtar" (kidding about "Ishtar").
But like all things, reality versus perception brings a huge gap. I was surprised to read that the Sahara Desert is only 15% sand and dunes. In fact, most of the Sahara and other deserts are rock and gravel. Sand is just a result of rock erosion from wind. Even brains like Milton Friedman didn't know; he said: "If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand."
Here's why I am telling you this: perception becomes reality. The market is scary because the media are endlessly beating bear drums. I know I sound like a broken record, but they do that because consumers buy less when they're happy. They buy more when they're scared. But don't let a few bad apples taint perception of our biggest investment opportunities.
Every day, we can see that the news media desperately wants war with Iran. The only thing that could boost media profits more than Trump is a war. Daily headlines are egging one on, but I believe Trump doesn't want war and will continue with sanctions on Iran. We won't know yet, but I can tell you one thing clearly: The. Market. Doesn't. Care.
And since the market's massive surge began weeks ago, the chance to back-up-the-truck on stocks may have passed for the near term. But in the long term, there is just no better place to be.
Populism is sweeping Europe. Rates on German bonds went negative last week. European political change is in the air, clouding the future climate of commerce and politics. China and its relations with the U.S. are still preventing the perceptions of safe investment there. Latin America is volatile and a tough sell to park assets.
Meanwhile, U.S. sales and earnings are growing. Interest rates are likely headed for a cut. The dividend yield on the S&P 500 is favorable over bonds. U.S. stocks are the place to be. This is all causing a capital flight to the United States. You want an oasis in the desert? U.S. stocks.
So, if stocks are the place to be, but we may have missed the latest chance to grab the leg up, what do we do? That's where the sand comes in. Just like a little sand paints a million desert pictures, a handful of the best stocks is all you need. You don't need the whole market.
Let other people chase market-timing and brag about entries and exits. You should focus on a few winners. Just like 15% of the desert is sand, a few big winners make all the gains in an outlier portfolio.
And winners can come from anywhere! Here's a perfect example: Hockey's best team this year was the worst three months into the season. On Jan. 3, 2019, the St. Louis Blues was dead-last in the NHL and miles behind the last wildcard spot in the Western Conference. Now, St. Louis players are taking turns eating Wheaties out of the Stanley Cup.
That's why I spend so much time on where big money is buying. Last week was massive buying in all stocks. Health care saw the biggest buying with 89 buys. It was split between pharmaceuticals, biotech, health equipment, and services. This is important because health has been beaten down for a while. Tech also saw big buying in software. Real Estate stocks also saw buying, as they offer higher yields in the face of lower interest rates. Financials, industrials, and utilities also saw big capital flow in.
Investors are buying stocks, but something interesting happened underneath. Thursday, June 20, was the single largest day of exchange-traded fund (ETF) buys since Jan. 24, 2018. We've had 35 days in our 30-year history with 40+ ETF buys in a single day.
That's interesting because a massive day of ETF buying happened with a low ratio of 50%. Generally, big ETF buys line up with a higher ratio. This is rare. We saw risk-off weeks ago, and now we see risk being put right back on. Our two prior instances of "lower" ratio and big ETF buying saw a much higher market one year later.
That means game on to me for the long run. Don't worry if you think you've missed this recent rally. Research the best stocks big money is buying. Focus on opportunities that come every day. Comedian Steven Wright had it right: "Someone asked me, if I were stranded on a desert island what book would I bring ... 'How to Build a Boat.'"
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. We expect unusual buying in stocks to gain in the coming weeks.
Disclosure: The author holds no positions in any stocks mentioned at the time of publication.