The same thing presented from different sources can have outrageously different results. For example, back in 1999, Czech Prime Minister Milos Zeman defended his wicked smoking habit. He said it helped his country financially, saying: "Smokers die sooner, and the state does not need to look after them in their old age."

It may be funny for a leader to say that. So, Phillip Morris took his lead and tried to sell the benefits of smoking to the Czech Republic. The company's logical argument was that people die earlier, saving the government millions on pensions, hospitals, and housing for elderly citizens. The tobacco giant cited an average 5.23 years of life lost for the smoker, calling them "indirect positive effects" of smoking. (See the LA Times story here.) Let's just say it didn’t go well. The media and political fallout from that Morris stunt was big.

But no one disputed the information. The same went for recent market action. Markets were overbought, and buying was drying up. Our big money index (BMI) was slowing, and the market started to soften.

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

So, I went out and said: "Get your cash ready to buy a dip." I had mine ready: moving thousands over to buy great stocks on a flash sale. I love doing that. The only problem is, the sale was like the superhero Flash. The market-wide sell-off lasted one whole day.

If you're like me, then I share your frustration. As buying screamed back, it felt like rushing for the subway and missing the train by a second, watching it zoom away. Now, the question remains: are we out of the woods yet? 

First, let's look at what happened from the shift in my data. When my buy and sell signals are netted together, we get a good sense of future direction of the market. Looking below, you'll see that green bars means more buying than selling, and red bars vice-versa.

My data said that the market went officially overbought Dec. 27, 2019. The Russell 2000 (my data correlates better with the index composed of many stocks) rallied another 2.1% over three weeks. Then my data started shifting, saying that sellers were dragging the BMI a little lower. I warned of a pullback by the end of January. Looking below, you'll see that the Russell 2000 fell more than 5%.

Chart showing net buy/sell signals and the performance of the Russell 2000 index
www.mapsignals.com

I'm not a day trader looking for the precise moment to jump in and out of markets. I'm a guy who wants to buy great stocks at reasonable prices. In the long term, I know of no better way to grow wealth. The point is, I was right about the pullback, but it wasn't long enough to do anything.

So, are we out of the woods? We are not – not yet. The BMI is not rising yet. We need to see buyers back in control for a little while for that to happen. If and once it does, we'll get right back to overbought levels in quick order, which means that I likely won't be buying stocks until they sell off again.

But last week showed chunky buying yet again. Looking at the sectors, we saw noteworthy buying in almost all sectors. The following sectors saw 25% or more of their stocks get bought in a big way:

  • Consumer staples 
  • Financials
  • Health care 
  • Industrials 
  • Information technology 
  • Materials
  • Real estate 
  • Telecommunication services 
  • Utilities
Table showing unusual institutional (UI) buy and sell signals by sector
www.mapsignals.com

The two exceptions were discretionary and energy. The first saw buying, just not as much as the other nine sectors. So, we'll lump that into the buying area (although it saw an equal amount of selling). Energy continues to be a saggy underperformer though. Buying dried up in energy stocks Jan. 9. Then, selling picked up. The Energy Select Sector SPDR Fund (XLE) has fallen about 10% since that buying dried up.

Chart showing net buys/sells and the performance of the energy sector
www.mapsignals.com 

Alas, buying is back after a single sick day – what a trooper! Energy is unloved, and everything else is fine. But don't allow frustration and FOMO to lure you into loading up. Prepare your buy lists in anticipation of some corrective price action.

The market is digesting impeachment acquittal, the hangover from the January effect, and the realization that maybe, just maybe, coronavirus won't eradicate all life on this planet. Great stocks are laying in wait to be scooped up when prices inevitably correct.

And judging by the one-way price action on the way up, I sense that it will feel scary and uncomfortable on the way down. Sick-to-the-stomach moments are usually the ones to plunge into your buy list. So, have it ready.

We are not giving the all-clear yet – in fact, the BMI is still falling. It is a lagging indicator but usually a great gauge of things to come. So, keep that in mind while you focus on outlier stocks you want to grab on sale.

Confucius says: "Success depends upon previous preparation, and without such preparation there is sure to be failure."

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.