Sometimes crucial information gets left out. Check this out: In the first publication of the Scouts handbook in 1908, the original Boy Scout Motto – "Be Prepared" – was followed by "to die for your country if need be…" Somewhere along the way, someone (brightly so) decided that telling young boys to prep for death wasn't as appropriate as "Be Prepared."

I was in the Boy Scouts, and I think making pine box derby cars would have been less fun thinking I was readying myself for a patriotic death. I don't think my 11-year-old brain would have really handled that the same way.

I believe that similar information exclusion is happening in how markets work. From here, the main leave-out seems to be a focus on what professional investors like hedge funds and institutions are doing. But to be fair, they work hard to keep their activity quiet. It doesn't help them for people to know what they are buying until they are done buying it! But this is where I focus my research. I believe that secretive, unusual institutional activity can help us decipher market movement.

The market recovery since Dec. 24 has been incredible. Recall, we felt that the immense selling of late 2018 was from forced exchange-traded fund (ETF) selling. We produced an exhaustive, in-depth white paper that outlines the case in heavy detail.

Since then, the buying has been in growth-heavy indexes, sectors and industries. S&P 500 Growth and Mid-Cap 400 lead substantially over value. The Russell 2000 and NASDAQ are significantly outperforming the Dow Jones Industrial Average. Russell Growth is crushing Russell Value. But again, my eye is on the PHLX Semiconductor Index, up 40% since Christmas.

Performance of the major indexes over the past week and since Dec. 24 lows

Back to the excluded information. Big buying since Christmas has been in information technology. This past week is no exception. Heavy growth buying is in favor along with consumer discretionary. Selling wasn't really anything to make note of:

Unusual institutional (UI) signals by sector

Software and semiconductors led the charge last week. Let me explain. We live in a modern world. Everyone is constantly connected to the internet. Even at home, my wife and kids are often on their phones, playing on their Xbox or watching Netflix. But when I settle down to work at night, I often run into internet issues. Sites load slowly if at all. Files syncing to my cloud storage hang up. And watching videos? Might as well not bother. The internet we all need grinds to a halt.

There's simply not enough bandwidth:

  • There are more than 75 billion devices connected to the internet.
  • Wireless customers experience calling problems and slow connections 16% of the time.
  • From 2015 to 2017, 4G mobile broadband errors were up 40%.
  • A 2017 Google study said that the average load time for mobile websites is 22 seconds – but 53% of visits taking longer than three seconds to load are abandoned.

We've reached the technological equivalent of needing to widen highways from two lanes to four. But there's a solution. 5G is "the next generation of mobile internet connectivity, offering faster speeds and more reliable connections on smartphones and other devices than ever before." That's according to the TechRadar website (which, ironically, finally loaded on the third try).

Among other things, 5G will enable:

  • New connections to Internet of Things networks (where devices like household appliances are all connected through the internet)
  • Autonomous driving
  • Faster broadband wireless speeds (10 to 20 times faster than what's currently offered)
  • Lightning-fast downloads, smooth streaming and lower latency (fewer delays)

The need for 5G networking is clearly here and now, suggesting that semiconductors will be in more demand than ever.

Now it's time for a quick visit on liquidity and the ratio of unusual buying and selling. Each day, I look through 5,500 stocks to see which are being traded unusually. On average, I get 500 per week. That number has been dwindling recently, as the first chart below suggests. The second chart shows us that the big ETF flush-out paved the way for strong buying since. Again, buying is in growth, specifically semiconductors. But as liquidity wanes, we just need to watch how the market takes earnings season. Thin volumes and negative news can cause big-time volatility as algo-traders move in and take advantage of those conditions.

Finally, the ratio has ticked back up into overbought, but on decreasing volume. I'm not sounding any alarm bells, but it's just a market condition to note. Thinner volumes and an earnings season are upon us.

Unusually traded stocks daily

S&P 500 trips

Unusual stock buys and sells

S&P 500/stock UI buys and sells

Ratio of buys to sells

Ratio of buys to sells

So, the bull is back after a winter of darkness. The message has been clear here: unusual institutional buying can show us what we need to know if we know where to look. "Get it – get it better or get it worse. No middle ground of compromise." – Henry Ossawa Tanner

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. Buying has started to pick up compared to the week prior, suggesting that the near-term trend is bullish. Any pullback is a buying opportunity.

Disclosure: The author holds long positions in any stocks mentioned at the time of publication.

Investment Research Disclaimer