My wife and I have a never-ending debate. It's about apple pie.
She's Belgian. She likes the European style pie. They call it tarte-au-pommes, or apple tarte. It's baked, and the apples are drier and less sweet than they are in the version I like. I prefer good ole' American apple pie. The apples are mushy and sweet, and there's that gooey gel. She thinks it's disgusting. I think hers is dry, crusty, and boring.
I guess no marriage is perfect, but my choice has to be better! I mean, the saying goes: American as apple pie, right? Apparently, it is not American at all. Neither apple pies nor apples originally came from America. Asia is the native origin of apples. As for apple pie, the first recorded recipe was actually in England.
No matter, though – mine's still better. But it just points to common misconceptions. This brings me to a question: is this market going to find its footing or continue to slide down a slippery slope?
Common perception has it that our economy is in peril due to the coronavirus pandemic. Job loss is off the charts. Restaurants and retailers are going under at an alarming rate. My mom just mentioned how sad it was that Lord & Taylor went bankrupt after over 100 years. Others are focused on the coronavirus case numbers exclaiming: "don't trust the news; it's worse than you think."
It's bad, but there is plenty of room for misconception. For instance: how long have Lord & Taylor-type stores been against the ropes? Many headline business closures have been suffering long before a pandemic came along to deliver the death blow.
And as far as numbers of new cases, they are dropping drastically from the July peak. Here in Florida, according to coronaviruscounter.com, new daily cases peaked at 15,134 on July 12 and are now averaging around 2,500. Even if the news fudged the number by, let's say, 50%, things are still markedly better than before.
So, when the selling in stocks comes to town and the bearish sentiment creeps in out of the woodwork, what are we supposed to believe? Is this the end of our shocking bull run?
In March, I told anyone who would listen to buy stocks. Pundits and media outlets were calling for a new depression and a cataclysmic economic future. Guess what: the Invesco QQQ Trust (QQQ) rallied 84% trough to peak.
Don't believe everything you hear. In fact, it's best to do your own analysis. The media wants you afraid and pessimistic. Their advertisers pay them money to have viewers. When viewers are happy and stress-free, they don't watch the news.
So now that the rally seems to be over, the news is coming out with plenty more negative fodder. Are we headed for the reckoning that many feel is long overdue?
No. This market is having a much-needed pullback. The rotation is real and underway. Money is coming out of tech – largely due to profit-taking. This profit-taking was sparked by day traders getting their balloon pricked. Day after day for months, day traders armed with stimulus checks would push up tech shares to a parabolic rise. I fully believe our future is tech driven, but the recent price rise needed a come-back-to-earth moment. This is it.
Last week saw some healthy continued selling in technology stocks. We saw 32% of our (tech) universe get walloped with big money selling. That's the headline grabber because prices went too far too fast. But look at the damage in energy: 67 out of 58 stocks were sold last week. That means many stocks were sold multiple days – and it was only a four-day week. Therefore, 116% of the energy sector saw big money selling.
Big money is coming out of tech and energy and sloshing back into discretionary, health care, and some staples stocks.
On a broader level, the market at large is clearly seeing less demand for stocks. But the Big Money Index foresaw this for a while. As we've noted, the Big Money Index was steadily falling for a weeks – even when the news was getting very bullish. Remember, when a market gets overbought, it can stay that way for a while. This time, it established a 30-year record for being overbought (84 days). But it peaked in June and steadily declined.
To nail exact tops and bottoms of markets is a puzzle, frustrating traders since the dawn of trading. But following big money can tell you what's to come. Generally speaking, we like when the Big Money Index is gently trending higher between the green and red lines. It means there's a healthy balance between buying and selling, but in favor of buying. This allows a gentle uptrending market to continue for a long time.
We came from extreme overbought in January to extreme oversold in March to extreme overbought in May. Overall, 2020 will mark a historic year for humanity, but it will also be historic for the data we collect. We may not see a market environment like this for years, possibly decades.
Or it may happen again next year. That's the thing: we never know what's to come. All we can do is interpret data real-time and react.
Our data indicates a waning appetite for stocks in the short term. I suspect that the next few weeks will be choppy as a base is formed and that buying will come in again to lift markets in the late fall to early winter.
The inescapable truth, regardless of the news, is this: rates are near-zero for the foreseeable future. There's nowhere else to put your money. Owning the S&P 500 for its dividends is 244% better than owning the 10-year Treasury for its yield, after taxes.
Apple pie isn't American (even though American pie is better than tartes). The market isn't headed for disaster – it may be choppy for a bit, but have your shopping list ready and pick your spots.
Sun Tzu said: "If you know the enemy and know yourself, you need not fear the results of a hundred battles."
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 a no positions in the securities mentioned at the time of publication.