When I left Wall Street to become a self-proclaimed quantitative stock analyst in 2014, I made a classic rookie mistake. I tried to be all things to all people. It was a disaster. My early research was called Macro Analytics for Professionals. My partner and I covered over 100 macro securities – everything including global stock indexes, currencies, metals, and commodities.

If you wanted to know if lean hogs were breaking out, I was your man. If you wanted to know if exchange-trade funds (ETFs) were heavily traded, I was your man. If you wanted to know how many stocks were bought and sold each day in a huge way, I was your man. But if you wanted to know which stocks to buy or sell, well that was just too secret. I wouldn't tell you that!

I could tell you what phase of the moon we were in. That was useful! It turns out – that wasn't such a terrible idea after all. I know hedge funds that paid one analyst thousands of dollars a year for his insights on the moon phases and how they affect markets. There are actually many studies showing strong correlation of market returns to moon phases. This Marketwatch article says that new moons mean 5% higher stock prices.

Image showing moon phases
Marketwatch

It makes sense: the moon's gravity moves ocean tides, and humans are mostly water. It's logical that it can affect our investment decisions too. Eventually, I ditched the moon and macro. I wised up and started giving people what they wanted – stocks.

Now, all I do is find stocks being traded by big money investors unusually. I pick stocks based on that and have found success in doing so. But I didn't fully abandon phases. I wasn't the Moon Guy (as he was known for his research). I became the Big Money Guy. You see, Big Money moves in phases too.

That's the Big Money Index (BMI): a reliable indicator for overbought or oversold markets. It looks like this:

Chart showing the performance of the Russell 200 and the Big Money Index
www.mapsignals.com

Surfers don't face an oncoming wave. They sit and look behind them at the horizon, waiting for the big wave to come. They start paddling to go with it until it gently brings them along with it. They wait to go with the wave phase. Moons and markets are no different. That BMI chart can be simplified into phases. It works like this:

Big money flows in phases

  1. Big money rushes in, and selling is non-existent (where we were for months).
  2. Big money buying slows, and selling starts to pick up some (where we've been over the past few weeks).
  3. Big money buying slows further, and selling grows (when the BMI starts falling toward 50% and lower).
  4. Big money buying is nonexistent, and sellers are in control (when it's time to get those buy tickets out).

It looks like this:

Chart showing money flows in phases
www.mapsignals.com

Currently, we're in category 2. The BMI needs to break below 60% to get to 3. Once we break below 50%, I get excited. That's when many professional investors are forced to sell because they get the tap on the shoulder from their risk manager. What is the Big Money telling us?

Risk-off buying

There is still big buying in the market, but recently, money is moving into "safer" equities. Over the past two weeks, there has been big buying in real estate investment trusts (REITs). This past week saw utilities post another spike of big buying.

Table showing the unusual institutional (UI) signals by sector
www.mapsignals.com

We've also seen money rushing into gold stocks. Gold has been on a bull run and has hit a seven-year high of $1,642.62 per ounce. To cap off the risk-off undercurrent, 30-year Treasury yields went the lowest ever on Friday.

Chart showing the 30-year Treasury constant maturity rate
Federal Reserve Economic Data

This tells me that a pullback could be near – it wants lower rates. I hope so – it's long overdue. I'm sure many have cash on the sidelines of this heated market waiting for use. I've been moving cash steadily, waiting for a dip to buy – I know I'm not alone! But let's embrace the pullback and be patient.

The BMI is falling, and for that reason, I've been cautious. I told you the data changed weeks ago. Then the dip came – for one day! Yet even as markets went higher, the BMI was heading lower. The message that it sends is, "the big money rushing into stocks ... it's slowing."

Oscar Wilde said: "Imitation is the sincerest form of flattery." I needed to imitate the Moon Guy to get inspiration for the phases I'm good at. That's hunting the Big Money. When they buy great stocks, I want to own them. When they sell great stocks at market highs, I want to follow their phases. When the selling cascades down to Main Street, they are getting ready to buy again. And so am I. Flattery made me embrace the Big Money phases.

I'll be at the TradersEXPO in NYC on March 9 at 11:45 ET. We'll be live streaming if you care to join!

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.

Investment Research Disclaimer