November 26, 2019

To teach a kid a lesson, keep it simple. Use plain language and fit the punishment to the offense. Right?

Throw the ball in the house and break something, you clean it up and work to replace it. Adults often make it too complicated. We also have a convoluted legal system with infinite loopholes and shades of gray, so it’s funny to hear about an adult getting a kid’s punishment. In 2012, a Cleveland woman made the obvious bad choice to “go around” a stopped school bus. Instead of just getting a ticket, the judge ordered her to stand at the scene of the crime with a self-made sign – for two days. It read:

Crime and Punishment Image

Simple, right?

Simple, direct language usually does the trick. As a writer, I’m often guilty of using too many words, which can make the reader’s eyes glaze over. All day, every day, the financial media debates bull vs. bear. They have people who think the world is ending or going along just fine. But few tell it like it is.

So I will:

  1. Markets are going up because of big buying.
  2. This buying is primarily happening in growth industries.
  3. The market will continue to go up until the sellers show up.
  4. The sellers aren’t here yet, so the party will keep going.

Here are the details:

Starting at the top, the Mapsignals Big Money Index (BMI) measures huge trading in stocks and ETFs. It looks at 5,500 stocks each day, looking for above-average buying and selling. Signals happen on about 100 stocks a day – less than 2%. But this 2% is extremely powerful – it’s what drives markets. It’s like the 2% of the population that controls 90% of the wealth, or the 2% of professional athletes that dominate all the stats. The truth is that all the juice is in the outliers, so when I see big unusual stuff happening within the unusual stuff, I must pay attention. It’s like when LeBron James is out-playing LeBron James!

The BMI is now at 72.5%. That means that 72.5% of all big trading signals are buys. The BMI is measured on a 25-day moving average to keep it smooth. This is a lot of buying and it makes sense that 72.5% buying would push markets higher. When demand outstrips supply, we know that prices go up.

If you’re worried that markets are overbought and could fall fast, don’t be worried just yet. Based on decades of our data on thousands of stocks, 75% is when we start getting overheated, and 80% is our official overbought level, when the sellers come to town. It can be the next day, or weeks later, but they always come. That means we’re not overbought yet.

Where the Big Money Went Last Week

It also matters where the buying is happening. If buying were all in Utilities, Telecom, and Staples, that would indicate investors are defensive. Those are “safe-haven” sectors, where investors look for lower volatility and higher yields. It’s the pacifier trade, and it’s usually when the boogey-man comes.

There’s no boogey-man in sight because big money is buying juice. Health Care saw explosive buying last week. Discretionary consumer stocks got bought bigly too. Tech and financials also saw big buying.

MAP Signals Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Let’s dig down another layer and see what industries are juicing:

We talked about software last week. It’s still getting bought.

Health Care saw 106 buy signals. In fact, it’s the biggest Health buying we’ve seen since summer. I wanted to see what buying like this means for the sector, so I went back three years to see prior instances. The left chart shows net buys to sells for Health Care. If there is more buying than selling on a day, then there’s a green bar. More selling means a red bar. See how it’s picking up recently (the right-most rise)?

Health Care Buys and Sells Chart and Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The table on the right shows what happens after we see buying like this. There were 14 prior times with multiple days of 20+ Health buy signals per day. The average forward 6-month return for XLV (the SPDR Health Care ETF) was +4.3%, and 78% of those instance (11 of 14) were positive with average six-month gains of +6.1% in the XLV Health Care ETF.

A big share (40%) of Health buying last week was in Biotech. So similarly, I wanted to look at unusually large buying in the Biotech industry group. The left chart (below) is a little different than the one above. The green bars show periods when Biotech buying is 1.5x bigger than average. The right table shows the 12-month forward returns of XBI (SPDR Biotech ETF), with average 12-month returns of +5.9%.

Biotech Buying Chart and Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Often, it’s better to just tell it like it is, like when a judge told someone who jumps the curb to avoid a school bus to hold a sign to that effect. Ahead of a short, quiet holiday week, we need to know that buyers are here, and I expect higher prices. When we overheat, there will be time to lighten up risk. Keep it simple. Like Einstein wisely said: “Everything should be made as simple as possible, but not simpler.”

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner