The problem with prediction is: it's a setup to fail. Anticipating outcomes is fun because, when you're right, you're a hero. When you're wrong, you stay as quiet as possible.

Here's another prediction truth: no one really cares in the end. And when they do care, it is for the wrong reasons. My friend Louie Navellier always says: "When I'm right, it's their idea. When I'm wrong, it's my idea."

Investing can be the single most frustrating game to play. Here's a perfect example: My dear friend rarely makes day-trading bets. For literally months, we have been debating the data I analyze.

Here's where prediction frustration sets in. The Mapsignals Big Money Index has indicated an overbought market since May 6. This followed a 17-day deeply oversold period from March 18 to April 9.

Chart showing the performance of the Mapsignals Big Money Index and the Russell 2000 Index
www.mapsignals.com

Prior to May 6, there were 19 overbought periods since Jan. 1, 1990. The average length of the overbought trading period each time was 20 days, or roughly one calendar month. So, one might have expected that, around a month after the market went overbought on May 6, indexes would descend. My data indicated exactly that, and on June 8, I said to expect a market to pullback or at least flatline.

Only the indexes frustratingly defied logic … or at least they seemed to. The power only came from one index, the NASDAQ.

Table showing the performance of major benchmarks
As of August 2, 2020. FactSet

And before you point out that the S&P 500 was also positive since June 8, look at this chart offered by Bespoke Investment Group.

Chart showing change in market cap since start of year
Bespoke Investment Group 

So, with the exception of the NASDAQ and five stocks in the S&P 500 Index, Mapsignals data struck again. It was right.

Fast forward to Thursday evening. Mapsignals data was now suggesting that sellers vanished again and that buyers have returned. If we look at the following charts, we can see that buying is increasing in discretionary, industrials, and materials. (Note: If the green line is increasing, the rate of buying in that sector is increasing.)

Charts showing the performance of sector indexes vs. sector Big Money Indexes
www.mapsignals.com

In contrast, health care and technology saw buying decrease in recent weeks. I believe that will change in the coming weeks. In a record-breaking overbought market, these may be value pools.

Charts showing the performance of sector indexes vs. sector Big Money Indexes
www.mapsignals.com

But how can the market stay so overbought? The answer is simple: there is no selling. I've learned in my career that there is really only one thing that moves stocks – supply and demand. When there's little supply, stocks don't sink.

You can see how selling has flatlined in the following sectors. (Note: If the red line is increasing, the rate of selling is increasing in those sectors.) Clearly, there is zero selling.

Charts showing the performance of sector indexes vs. sector Big Money Indexes
www.mapsignals.com

Finally, take a look at the absence of selling in the financials, discretionary, and real estate sectors.

Charts showing the performance of sector indexes vs. sector Big Money Indexes
www.mapsignals.com

But wait – we never exited overbought territory, right? In fact, in three days, this will become the longest overbought period in my 30-year history.

So, buyers are back, and we are into earnings season. August is typically volatile, and earnings have to suck because of coronavirus, right?  

Wrong. There were some cheery earnings announcements Thursday after the bell. Facebook, Inc. (FB), Apple Inc. (AAPL), and Amazon.com, Inc. (AMZN) all surged after hours on good announcements. Apple kept the theme with a solid report and announcing a four-for-one stock split. Here's a quick summary of key tech earnings in the past week or so:

  • Apple: beat and raise
  • Amazon: beat and raise
  • Facebook: beat and raise
  • Lam Research Corporation (LRCX): beat and raise
  • PayPal Holdings, Inc. (PYPL): beat and raise
  • Alphabet Inc. (GOOGL): beat and raise (first ever rev decline)
  • Skyworks Solutions, Inc. (SWKS): beat and raise
  • Qorvo, Inc. (QRVO): beat and raise
  • Intel Corporation (INTC): miss
  • Advanced Micro Devices, Inc. (AMD): beat and raise

(Disclosure: MAP or its founders hold long positions in Lam Research, PayPal, Alphabet, Skyworks Solutions, and Intel.)

Street analysts got it wrong yet again. Earnings expectations were simply too low. The stay-at-home trade is very real for technology.

All of this set up incredibly well for a strong NASDAQ performance on Friday. Logically, my friend thought the market should lift off like a rocket come Friday morning. I agreed. He was monstrously bullish after the weekend prior being flooded with bearish outlooks. The setup was right to predict a big bull move. He put on what he described as the single biggest trade of his life with a setup to cash in on a major rip for Friday. It set up for a very nice weekend.

Only the market didn't do what it was supposed to. Does it ever? That and a hurricane was seemingly headed for a direct hit on the eastern coast of Florida where we both are.

Somewhere around noon, things looked pretty grim for my friend. It didn't make sense. He should have been making the most on a day trade in his life. Instead. it was looking like the opposite. 

Fortunately, he stuck with it and cashed out for flat. He had a few new gray hairs and a lot of Pepto by late afternoon. But he was out and skirted a financial wreck. Phew.

Only then, the frustration piled on. He watched the trade play out just as he expected. Buyers raced in and lifted the market in the waning hour of the week. He called me. He was angry – understandably so. 

I told him that's how I felt when I tried day trading. It was 2001. I set myself up with an account to trade the USDGBP currency pair. I traded for 21 days. I lost money on 19 of them. I bought the high, sold the low, and ended up with a lot of bruises on my fists.

I learned an immense lesson, though: trading by my gut will nearly guarantee poverty. I removed any nook or cranny that might contain emotion. I can only look at data now.

However, with that, I try to not predict. I use history as a guide, not a rule. For example: just because it has never happened, there is no rule that says markets can't stay overbought for an entire year. 

I must unemotionally surf the market and react to what it gives. I use data as my GPS. I offered my friend that, for what it was worth. I felt his anguish. He wanted to punch the market in the face.

But it wouldn't matter. It will just do what it is going to do. You don't tell the wave where to go, you let it take you where it's going. Right now, it's going up.

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: At the time of publication, the author holds long positions in Lam Research, PayPal, Alphabet, Skyworks Solutions, and Intel, but no positions in the other aforementioned securities.

Disclaimer