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This market is like the sun. Sunlight travels at the speed of – well … light. To get to earth, it travels 93 million miles at 186,000 miles per second. That means it takes eight minutes and 18 seconds to get here. If the sun vanished, we wouldn't know until eight minutes after.
Big money is an ocean on which markets float. But when big money has a seismic shift, there's usually a delay in the market following. Think of it like the sun's eight-minute lag.
I pointed this out before with the Mapsignals Big Money Index. Look again at this chart showing how, in January of this year, the Big Money Index peaked well in advance of the market peak. It took nearly a month of lag for the indexes to react to the Big Money selling going on under the surface.
Recently, we talked of a shift in the data. Buying visibly slowed. The Big Money Index even started to tick down a bit. And right on cue, the market fell. Remember the -6% day on June 11? And then stocks resumed their gravity-defying march upward.
Many headlines I've read recently portray incredulous money managers. They are aghast as to how stocks continue to rise. Crescat Capital's Kevin Smith says stocks are insanely disconnected from reality. Ray Dalio warned of a "lost decade in stocks." And Leon Cooperman said that the rise of mom-and-pop investors in the stock market will end in tears.
I had breakfast once with Mr. Cooperman. I have a lot of respect for him, his accomplishments, and his acumen. But do I agree with him? What should we make of the bear saber rattling? Normally, I like bearish headlines. Markets act like teenagers. My teens often do the opposite of what I ask.
But there's plenty of bullish headlines out there too. Barron's said: "Biotech stocks are getting ready to run." The publication also said: "Oil's rally points to better times ahead.” And there's ample news of vaccine developers racing to battle coronavirus.
But cases are spiking now in parts of the nation. Apparently, where I live in Florida has the makings of the next coronavirus epicenter. My wife heard that the local hospital's ICU was 75% full. The same day, I heard from a neighbor who works at the same ICU that it was empty.
Trying to make sense of the conflicting news reports is mind-bending. Trying to make investment decisions on them? Well, I decided that was a bad idea decades ago. If I want to know what the market is likely about to do, I look to data for answers – not stories.
One thing I am confident of is this: a shift is about to happen. There's a market tell. It's like in the great 1998 poker movie "Rounders" in which John Malkovich plays the uncrackable player Teddy KGB with an unrivalled poker face. It took a long time for Matt Damon's character to discover his tell. But when he finally did – well, I won't spoil the movie for you.
The market's tell is this: big buying is slowing. I mentioned that last week. First off, it's slowing in exchange-traded funds (ETFs). Two weeks ago, I told you how ETF buying was record breaking. I also said that this was historically a terrible time to buy stocks. Since I said that, the S&P 500 dropped 4.08%.
Look, monster ETF buying never lasts. Take a look at how big money moves in and out of ETFs against the picture of the broader market. This chart shows big ETF buying/selling activity. Green bars are all ETF buys each day, and red bars are sells. This is when I believe big money is flowing in and out of ETFs. The circles are extreme buying in ETFs. The right-most circle is massive buying from June 8. But look for the tiny circle just off to the right of that. That's a huge drop-off in ETF buying.
Here’s a zoom-in on that.
You can see clearly that buying slowed down. But big stock buying is slowing too. When we look at big money activity in stocks, we see the same stuff. Buying peaked two weeks ago – the same time as ETFs. Below we see Mapsignals Big Money buying and selling in stocks. A green bar means net buying, while red means net selling. We saw a monster green bar two weeks ago.
But then we see the same thing – a vacuum. Buying dropped bigtime.
Ebbing greed is understandable after a wave of frenzied buying. So, while the news jerks around our emotions making for a confusing horizon, the data gives me a clearer image. It's a market tell. It tells me to expect lower prices for stocks in the near term.
And that's a great thing! I love to grab great stocks on sale when everyone else is afraid to own them. You want to buy when the crowd is scared.
I think markets are setting us up for a better entry point soon. I don't subscribe to the dire bear growls of prolonged stock market pain. I don't see a bear market. I see an economy that wants to be back in full swing. I see equity optimism that was spurred by big money buying. It's now getting frothy with the entry of and talk about mom-and-pop investors using stimulus checks to buy stocks. When the inevitable washout comes, the market will reset and resume a chug higher.
A columnist I highly respect points out that COVID-19 still represents the highest risk of fatality for people 75 years of age and older with pre-existing conditions. He says to let the young go back to work. Give them a reason to wake. Give the economy a shot to come back. Let the elders self-sequester until a vaccine becomes available. Incidentally, he is celebrating his 75th birthday.
COVID case spike news will likely be the crack to bring the market pullback. The story will stick even though the tell was there long before: the big money buying vanished. As we say at Mapsignals, "You’ve heard don't fight the tape? I've learned don't fight the big money."
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.
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June 22, 2020 at 08:43PM
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Big ETF and Stock Activity Is Slowing - Investopedia
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