On your fingers, count how often you've been wrong in your life. If you need many hands, you're not alone. We're all wrong occasionally. For me, it's maybe once every two years (gotcha!). Being wrong is human. But being wrong can also be a group thing. Group – as in the entire planet.

Remember when smoking was good for you? For those that do, you probably recall ads promoting the health benefits of smoking. Look at the old ones of doctors choosing their favorite cigarettes. And the comical aphrodisiac effects of blowing smoke in a woman's face. Single guys – try that today and see where it gets you.

People get it wrong constantly, and the consequences can be massive. Friday was a perfect example. Economists expected 8 million additional job losses and unemployment to surge to nearly 20%. Reports readied charts showing the highest unemployment since the Great Depression.

Well, guess what? Smoking kills, and Friday's jobs numbers shocked everyone! Unemployment actually dropped to 13.3%, and 2.5 million jobs were added. That was likely the biggest expectation error in history, and almost everyone had it wrong.

Naturally, stocks loved the news and surged on Friday. All major U.S. indexes were up sizably. Bears were caught with shorts that were too tight, and it must have hurt. They got it wrong yet again since this market bottomed on March 23. People get it wrong all the time: deal with it. But the data has been saying "don't mess with the bull."

Big money buying and selling is measured by looking at over 5,500 stocks each day. Simply put, when stocks break out or down from a range on big volume and volatility, that constitutes a buy or sell signal. And big money buying data last week was immense. There are a few important reasons for this:

  • The jobs report was a big reason we saw such huge buying across the board. Wall Street looks forward, and the data has been saying that big money has been flowing into stocks in droves.
  • One of the factors in my algorithms is when a stock breaks above prior areas. When the market crashed, the three-month highs reset lower day by day as previous highs rolled off. It's like measuring peak altitude every 10 minutes while descending on an aircraft – you get further and further away from peak altitude, but for each measurement the peak gets lower and lower. So as we ascend again, we get further away from depressed prices. To simplify, as long as we break highs on decent volume, there will be lots of buys … which there were.
Chart showing Mapsignals Big Money Signals and the performance of the Russell 2000 Index
  • Volume has been big, and the market has been rocketing higher. In a vacuum, that would breed buy signals.
  • The MSCI rebalance was a week ago. This bred big volume buying as passive managers bought stocks to get in-line with the index they track.
  • The Russell rebalance is coming up, and on Friday, June 5, the preliminary lists were communicated to the marketplace, starting managers in motion.
  • Exchange-traded fund (ETF) buying was off the charts. Gone are the days when Financial Advisors (FAs) focus solely on individual stocks. ETFs offer exposure to stocks in a convenient lower-volatility package. FAs also earn nice fees directing your money into ETFs. Huge ETF buying is a sign that retail (mom and pop) money is pouring back into stocks.

Below you can see the Mapsignals Big Money ETF Index. Friday was a massive buy day.

Chart showing the Mapsignals Big Money ETF Index

To illustrate how big the buying in stocks was, let's look at the sector flows. Normally we see one or two sectors emerge "yellow" – meaning the sector saw 25% or more of its universe exhibit big money buy signals. Notice how every sector saw huge buying, with five sectors seeing more than 100% of their universe bought in a big way: discretionary, industrials, materials, financials, and real estate. Meanwhile, technology and energy weren't far behind.

Table showing big money buy and sell signals by sector

Markets are heavily overbought, so what comes next? One big clue is the ETF activity. Here is a chart of 15 years of ETF buying. The green bar on Friday was the highest ever.

Chart showing big money ETF buying

But here's the same chart showing only days of 50 or more ETFs bought in a day, which is extreme buying.

Chart showing instances with greater than 50 ETF buy signals in a day

Look – mom and pop tend to get into the market near crests. History shows it, and they are plowing in right now in a record-breaking way. Here is a table of forward returns for the S&P 500 each of the 19 times shown in chart above since 2005.

Table showing forward returns for the S&P 500 Index
www.mapsignals.com, FactSet

Forward returns are not that exciting. In fact, based on this data, we can expect a rocky few months ahead. Markets don't always make sense. News is ugly: Pandemic. Death. Riots. Civil unrest. Major unemployment. So what do stocks do? They go up of course! 

I told you before: it doesn't have to make sense. What's important is knowing how to react when data changes. Now we are at extreme overbought levels, and it seems the last buyers are jumping in ... retail. History says, "be cautious."

But extremes can continue. We must ride the wave until it crests, but I suspect that we are close. To be clear: I am long outlier stocks and staying that way. I am prepping cash for better entries likely around the corner to add great stocks I don't have. That's a win-win prospect.

Don't stand in front of a train arguing with it over how fast it's going. The market is a pure form of adapt or die. Debating why a market shouldn't be a certain way satisfies intellectual curiosity but may not make us any money. Since March 23, the market has had different plans than the headlines. 

It reminds me of the movie "The Breakfast Club" when Richard Vernon said: "Don't mess with the bull, young man; you'll get the horns."

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 no positions in any mentioned securities at the time of publication.

Investment Research Disclaimer