December 24, 2019

Information doesn’t always say what you think it says. Did you know that Chicago’s “Windy City” nickname has nothing to do with the weather? It came from 19th century journalists who said that Chicago residents were “windbags” full of hot air.

That information may be unimportant to your daily life, but sometimes the important stuff is buried underneath everything else you see and hear. When it comes to the stock market, for instance, did you ever look up at a TV screen and notice that a stock you hold is being praised for its huge gain? Maybe Cramer says: “XYZ is up 18% on huge volume!” It feels great. You’re holding a winner and you know some big money is rushing into a stock you own. Well that’s a big money buy, one of the buy signals I look for. But it feels less great when you happen see a sell signal on your stock. Maybe it’s down 10% on huge volume and money is rushing out…

I see buy and sell signals daily that come from surveying over 5,500 stocks. To simplify, buy (and sell) signals happen when a ton of money pushes stocks to near-term highs (or lows) on massive volume and volatility.

But there are big trades every day that don’t push stocks to new highs or lows. These are just big whopper trades on monstrous volume moving in and out of a stock. It can even happen without any impact on price. It happens every day: About 10% of stocks trade on huge volume daily. Odds are, you might not even notice if trading like this happens on stocks you hold. That information is below the radar of the mainstream media.

Last week, I saw some of this “off the radar” information which has potentially big impact on the future – and no one is talking about it. In short, big buying was off the charts again last week. In fact, every sector saw “pay attention” style buying. In the table below, that’s when a sector sees a yellow box in the “% BUY” column. (The yellow highlight comes on when more than 25% of the big money stocks in the sector log buy signals.)

MAP Signals Table

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

Notice that every sector earned yellow, and they weren’t just peeking above 25% either. This was earthquake buying. To log a buy signal, you need volume, volatility, and near-term highs all getting eclipsed. It’s not that common. Last week we saw 890 total signals (versus a 20-year weekly average of 505), well above average. Perhaps more stunning is that I saw 2.4 times the weekly average big trades last week. Here is a summary box:

Buy and Sell Signals Summary Table

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

Now, you should know that I am all about focusing on outlier events – things like “by far the best” or “the worst” in a category, and repeatably so. Think names like Warren Buffett for investing, Tom Brady or Drew Breese for football, or Lebron James for basketball… you get the picture. Last week’s buying was a big outlier event, so much so that I looked back over 30 years to see how big it was, and what it means going forward.

What Does a Week of Such Big Trading Volume Mean?

Here’s the idea: When I see monstrous trading volumes, it has very accurately told me that a trough was here. It makes sense: People usually throw in the towel when the pain becomes unbearable. Usually it’s the everyday investor that gets shaken out at the bottom. The cries of “uncle” tend to all come in unison.

If we look at the 30-year chart below, we can see the red bars come on days just like last Friday, when the big trades were more than 2.4 times the 1-year daily average. (For reference, the gray bars are bear markets.)

Standard and Poor's 500 versus Unusually Large Trades Chart

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

Overall, it looks pretty bullish when these red days appear. But what happens when we zoom in to see when they happened in the near-term market cycles? Here you can see June 2013 to Jan 2016. Notice how each of the four times we saw 2.4 x the big trade volume, it coincided with market troughs? Those are blow-outs.

Standard and Poor's 500 versus Unusually Large Trades 2013-2016 Chart

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

Next, I wanted to find a scenario more similar to last week, where buying was massive at a market high. The problem is: I could only find one. That was in December of 2017. What I saw was encouraging, initially. The market had more gas to rise significantly, that is, before the inevitable pullback, which resulted in another big blow-out in a couple of days in February 2018. Notice again, the subsequent red bars happening at troughs?

Standard and Poor's 500 versus Unusually Large Trades 2017-2018 Chart

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

And just to satisfy my curiosity further, here are similar days in deep bear market correction months, September 2008 and August 2011. It’s bearish near-term, but still bullish long-term:

Standard and Poor's 500 versus Unusually Large Trades 2008-2011 Chart

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

So what does all this mean going forward? Here is a table of ALL the instances when big trades were 2.4 times the 1-year daily moving average.

All Big Trades Table

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

Overwhelmingly, it’s bullish. Putting aside the swath of red you see for forward returns before the 2008 bear market, the six, nine and 12-month returns in the last 10 years averaged double-digit gains. Even including all the 2008-09 carnage, the average 1-month to 12 month returns are all positive going back 30 years.

Here’s what I think: The market should lift for a few more weeks. Then we will be decidedly overbought. I would expect a healthy but uncomfortable pullback. Don’t add risk now. Ride your longs with an eye towards trimming positions you are happy cutting. Sell into the rally. Raise cash to identify buying opportunities when the inevitable pullback comes. I feel the second half of January into February should bring lower stock prices.

In a world of emotional responses, keep an eye on the hidden information. Artist Paul Klee said: “One eye sees, the other feels.”  Make sure you see.

About The Author

Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT

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