We can’t see most of the light spectrum.
Be sure to take the lens cap off before photographing. – Elliot Erwitt
Let’s start with an overall view of the market. We can easily see the trend of the S&P 500 for 18 months:
It went up, down, then up with some bumps along the way. We all know experiencing it was not that simple. But, let’s look at the internals.
Here, we’ll plot the MAPsignals version: the Big Money Index. It tracks all unusual Big Money buying and selling on a 25-day moving average. Notice how the picture changes. Have a look:
As we can see in this small sample (only 18 months out of 31.5 years of data) when markets get overbought (above the red line), it can lead to a fall. And when markets get oversold (below the green line), it can precede a monster rally. Oversold is rare. Only 1% of the last 10 years it triggered. Recently the BMI has been range bound, frustrating market timers.
Like most things market-related, the BMI is a great tool when it’s trending. When it’s not, it can cause traders to get anxious. So how do we get a better sense of when the Big Money Index will start ramping again?
To answer that question, look at the SPY (S&P 500 ETF) chart with a study I did. I calculated a 20-day moving average of daily buy signals. Then, to separate higher than average periods of buying, I made a simple formula: if that day’s buying was bigger that the 20-day average give it a “1.” If it was less, give it a “0.” So below in green reveals days when buying was more than the 20-day moving average:
The picture of the market is coming into focus. Unsurprisingly, when buy signals were larger than average, markets usually rallied.
Now let’s keep going. Let’s do the same type of study for selling. When one day’s selling was higher than the 20-day average, it got a “1.” Otherwise, it got a “0.” Check it out:
When selling picks up, markets tend to fall.
So where are we now and where are we going? Let’s zoom in. What we notice is that buying and selling happened in May. That makes sense with the big rotation out of Technology stocks and into real-economy sectors.
But the storm suddenly passed. And recently things have been calm (no big buying or selling). That is until Thursday May 27th. The buyers showed up:
Real Estate, Communications, and Discretionary stocks saw the love. Utilities were largely for sale. Let’s breakdown the buying by sector:
Finally, look at the quality of those buy signals. Discretionary stocks had a 3-year earnings growth average of just +1.3%. And 3-year sales growth rate of -347%. Contrast that with Technology stocks seeing an average 3-year earnings growth rate of +44% and 3-year sales growth rate of +22% (source FactSet).
What’s my take on all of this? Quality growth stocks are starting to get bought after a long quiet period. Stocks hurt by COVID-19 are the new growth areas.
It’s simple. Earnings, surging profits, and a reopened economy is very bullish for stocks.
We could be setting up for the next leg higher.
Here’s the bottom line: The data is turning bullish for stocks. Buyers are showing up and based on history, markets could be ready to blast off.
Disclosure: the author holds no position in SPY or the S&P 500 at the time of publication.
Learn more about the MAPsignals process here: www.mapsignals.com