Information isn't always what you think. Did you know that Chicago's "Windy City" nickname has nothing to do with the weather? It came from 19th century journalists who said that its residents were windbags and full of hot air. That information is unimportant. Sometimes, the important stuff is buried underneath everything else you see and hear.
When it comes to the stock market, did you ever look up on TV and notice that a stock you hold is being called out for a huge gain? For example, Jim Cramer says: "XYZ is up 18% on huge volume!" It feels great. You're holding the winner, and you know some big money is rushing right into the very stock you own. Well that's a big money buy, one of the very buy signals I look for. It feels less great when you happen to see a sell signal on your stock, like when it's down 10% on huge volume: money is rushing out.
Cramer highlighting your juicer feels great, but you didn't need the info – you bought it well before. But interesting info lurks underneath. I see buy and sell signals daily that come from surveying over 5,500 stocks. Simplifying buy (and sell) signals happens when a ton of money pushes stocks to near-term highs (or lows) on massive volume and volatility.
But there are big trades every day that don't push stocks to highs or lows. These are just big whopper trades: monstrous volume moving in and out of a stock. And it can happen without any impact on price. It happens every day; about 10% of stocks trade on huge volume daily. The odds are that you might not even notice if trading like this happens on stocks you hold. That information is below the radar of the mainstream media.
In the prior week (Dec. 9 through Dec. 13), I saw that some of this "off-the-radar" info has potentially big impacts on the future. And no one is talking about it. In short, the buying was off-the-charts huge again last week. In fact, every sector saw "pay attention" style buying. In the table below, that's when a sector sees a yellow box in the % BUYS column. It's when more than 25% of the big money stocks in the sector log buy signals.
Notice that it wasn't just peeking above 25% either. This was earthquake buying. To log a buy signal, you need volume, volatility, and near-term highs all getting eclipsed. It's not that common. On any given week going back 20 years, we expect 500 stocks to make buy or sell signals. Normally, when we get a ton of signals, they are sells and typically signal a near-term low. Well this week we saw 890 total signals versus a 20-year weekly average of 505: nearly twice the average. Perhaps more stunning is that I saw 2.4 times the weekly average big trades last week. Here it is summarized in a table:
Now, you should know that I am all about focusing on outlier events. These are things like the best or worst in a category by far, but repeatedly so. Think Warren Buffet for investing, Tom Brady or Drew Brees for football, LeBron James for basketball … you get the picture. Last week's buying was a big outlier event. So much so that I looked back over 30 years to see how big it was and what it means going forward.
Here's the idea: when I see monstrous trading volumes, it has very accurately told me that a trough was here. It makes sense; people usually throw in the towel when the pain becomes unbearable. Usually, it's the everyday investor that gets shaken out at the bottom. The cries of "uncle" all come in unison. If we look at the 30-year chart below, we can see the red bars are days just like Friday, in which the big trades were more than 2.4 times the one-year daily average. The gray bars are bear markets for reference.
Overall, it looks pretty bullish when these red days appear. But what happens when we zoom in to see when they happened in the near-term market cycles? Here you can see June 2013 through January 2016. Notice how each of the four times we saw 2.4 times the big trade volume that it coincided with market troughs? Those are blow-outs. People's wrists were bent back, and they had to sell to relieve the pain.
But I wanted to find a scenario similar to last week, where buying was massive at a market high. What happens with big buying? The problem: I could only find one. Here we look at December 2017. What we see is encouraging initially. The market had more gas to rise significantly. That is, before the inevitable pullback that resulted in another big blow-out couple of days in February 2018. Notice again that the subsequent red bars happen at troughs?
And just to satisfy curiosity, here are similar days in bear markets: September 2008 and August 2011. These are bearish in the near term but still bullish in the long term:
So what does it mean going forward? Here is a table of each instance where big trades were 2.4 times the one-year daily moving average.
Overwhelmingly, it's bullish. Keep in mind that the swath of red you see for forward returns was ahead of the 2008 Financial Crisis Bear Market. The average 1-, 3-, 6-, 9-, and 12-month returns were all higher looking back 30 years.
Here's what I think: the market should lift for a few more weeks. Then we will be decidedly overbought. I would expect a healthy but uncomfortable pullback. Don't add risk now. Ride your longs with an eye toward trimming exposure you are happy cutting. Sell into the rally. Raise cash to identify buying opportunities when the inevitable pullback comes. I still feel that the second half of January into February should bring lower market prices.
In a land of emotional information, keep an eye on the hidden info. Artist Paul Klee said: "One eye sees, the other feels." Make sure you see.
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.