Sudden shifts happen in nature and serve it well. The hairy frog cracks its toe bones and creates sharp claws when threatened. I have a simple market view: to know market direction, follow big money. When it shifts on a dime, pay attention.
Last week, I said, "With last week's data, I might be changing my tune to short-term bullish." While I prepared two weeks ago for a -5% market dip, data changed, saying that big money was buying. And when big investors buy, it often precedes a bull run. First, the data said, "prepare for turbulence," but then it shifted quickly. Looking at thousands of stocks every day, when data shifts – you shift.
I'm glad we did – because the market ripped with big money buying – specifically small-cap domestics. Look at this chart:
Into last week, selling had outpaced buying for five weeks. Typically, selling is clumpy and lasts a while. Then, it dries up and buying grows. The cycle repeats constantly.
What do big buying and selling look like? My research firm looks at 5,500 stocks per day. We use algorithms to sift through data and pinpoint big investors – pension funds, hedge funds, etc. – moving money in and out of the market abnormally. For simplicity: when a stock's volume and volatility spike, that creates signals. In a normal uptrending market, we expect more big buyers than sellers. It makes sense and looks like this:
But when selling comes and takes control, it looks like this:
Then we expect downward market prices. What's cool is that this selling often foreshadows a fall. Meaning, selling can happen under the surface while big investors dump stocks, but indexes can still rally for a while. I've seen it time and time again. That's why it's crucial to watch what the biggest investors do. As Louis Navellier says, "You'd rather be the nose of the dog than the tail."
A couple of weeks ago, when data said to expect a dip of around 5%, it was good to be ready. But the drop didn't come, and what did was big buying – from nowhere. This was the shift last week:
This new information said that buyers were here and expect "up-volatility." The Mapsignals Big Money Index stopped falling and reversed:
Where are we now? Last week's buying was big. The story changed when buy signals started on Wednesday, Sept. 4. Since then, the iShares Russell 2000 ETF (IWM) rocketed higher by 6.41%. This resembles a huge unwind … a wicked reversion.
The table below shows where the big buying and selling was last week. The yellow shows when 25% or more of a sector universe was bought. That's big buying! Tech, industrials, discretionary, telecom, financials, staples, real estate, materials, and (nearly) health care saw abnormal buying. That's almost the whole market. Energy's levels are so depressed that we need higher prices first to make technical buy signals – so don't expect that just yet.
But look at the lone yellow sell: also tech. How can we have both tech buying and selling? It was a rotation. There is an unwind in some high-flying stocks. The media calls them "momentum stocks," aka high-beta stocks. These stocks significantly outperform a benchmark index.
Imagine that XYZ stock is up 40% while the S&P 500 is up 20%. That's a beta of 2: a high-beta stock. Software has been a major winner over the past months. The group has some of the best stocks out there. That is until last Monday. Nearly 70% of info tech's selling was in software.
So, the reversion hypothetically looks like this: I'm a money manager. I'm heavily long high-beta stocks because they outperform. As a hedge, I short stocks that underperform in the same growth area. I thereby maintain balance in my portfolio, being both long and short stocks.
Suddenly, something changes, and traders liquidate high-beta stocks and cover shorts. The crowded trade causes a dash for the exit. Last week was clearly: sell software and buy small caps. Then you realize that the algo traders already ate your lunch. The computer-based trading firms react in nanoseconds, not hours or days. Humans can't compete, and forced liquidation happens, preserving gains or stemming losses.
But nothing is wrong with many software stocks – they were just the winners. When you need profits, you take the biggest ones eroding fast. Many are awesome companies. Imagine an LED on your house's front-door. Monday. it says "Value=$500,000." Tuesday, it says "Value=$400,000." Why? Your house is in the best neighborhood with no crime in the best school zone. The fact that your neighbor fell on hard times and must sell shouldn't affect your house's value overnight, right? But that's how it is in stock markets. So be on the lookout for deals, because they are out there.
The data said to expect a drop but quickly changed. The smart adapt and survive. Stephen Hawking said: "Intelligence is the ability to adapt to change."
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.