December 3, 2019

Check this out: Researchers taught rats how to gamble. These rats soon learned to “play it safe” in order to maximize their winnings. They were focused winner-rats! Then, the researchers introduced flashing lights and sounds! The rats changed. They abandoned their conservative logic and went for high risk, high reward (source: “Flashing Lights and Sounds Turn Rats into Gamblers,” Discover, Jan. 2, 2016)

Gambling Rats Image

The first thought that came to me wasn’t Las Vegas, but the financial media. You know I habitually trash CNBC, so I’m going to do it again now. Years ago, financial talking looked bland and stuffy – a bunch of old-dudes sporting bowties – kind of like this shot of Dan Dorfman (no bowtie this time):

Dan Dorfman Image

Now, we have flashing lights, buttons, loud noises and sometimes utter nonsense, as with Jim Cramer…

Jim Cramer Image

Investing is like the strategic winner rat. But media, high-pressure brokers and tipsters create gambler rats in a casino. They want everyone to abandon logic and “go for it!” It’s better for business. TV needs viewers to see their ads. Advertisers pay the networks and “boring” doesn’t cut it. Brokers need you to trade, not invest. They need your commissions. Even the no-fee brokers need you to trade in order to sell your order flow to the highest bidder. The more you trade, the better they feel. They need trader rats.

I know I’m a broken record on this, but I believe the truth lies in the data. I measure the market based on big money moving in and out. When the biggest investors buy and sell massive amounts of stock, they often dictate where the market is headed. That’s why my day isn’t filled with TVs, ticker tapes, flashing lights, and buzzers. I gave that up years ago, and I have been way more focused ever since.

Last Week was a Boring, Slow Week – Not!

What the data says now is that buyers are plowing into risk. They are buying stocks at an exciting pace.

Last week was a typically slow holiday-shortened week – well, on the surface it may have seemed that way. But, beneath the quiet surface, reality saw huge buying. We saw big accumulation in Health Care, Financials, Real Estate, and Consumer Staples. Tech also saw nice buying, along with Industrials:

MAP Signals Table

Health Care continues to be the hottest sector right now. I noted this uptick in Health Care buying in late October. Health Care has been ripping ever since. Look at this chart showing XLV (the SPDR Health Care Sector ETF) mapped against Mapsignals’ net buy and sell signals. (More buying on a day means green bars. More selling means red bars.) XLV rallied more than +8% since the uptick was noted.

Health Care Buys and Sells Chart

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

Last week Health Care buying kept on trucking. We saw 118 buy signals. Most of that buying (89) came in Biotech. That’s been the theme of Health Care for the last month: Big Money loves Biotech.

Biotech Signals Table

Tech and Financials also saw big buying last week. Those sectors continue their run higher. But the real story lies under the surface. As you can see in the table above, Software saw 55 buy signals, split between Tech and Financials. Software stocks have been bought big since the late September clobbering.

Tech and Financials Buys and Sells Charts

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

The next chart shows that when we see prolonged periods of Software buying, mapped again the iShares Software ETF. The green is when buying is more than 1.5x usual. It usually means higher prices ahead.

iShares Software Exchange Traded Fund Chart

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

So, as the pundits on TV debate impeachment, North Korean Missile firings, Ebola and the fate of endless Democratic candidates, they paint an undertone of fear. They fuel a bearish view of the market, but the data is quite different. It’s like the calm in the storm. It says investors want stocks – and want them badly.

That’s the good news. The bad news is that buying like this can’t last forever. The Mapsignals BMI (Big Money Index) lifted to 74.6% last week. That means that over the past 25 days, 74.6% of all signals were buys. That’s a kiss away from being “overheated” at 75%. That’s when the needle is in the yellow. A BMI of 80% is overbought and that has a strong history of predicting pullbacks in the market.

Russell 2000 Chart

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

All this really means is proceed with caution. This is not the time to get caught up in the fervor and jump in. It means: Don’t become the rat, drunk on noise and lights. That becomes a high-risk proposition. The time to buy was weeks ago, but the time to sell is also probably weeks (or months) away.

That said, if you’re long, stay that way and perhaps look for areas to trim risk in the coming weeks. You may have a profit you’re targeting to take or a trade that came back to flat. When the market becomes overbought is the time to reduce risk. I just wouldn’t be adding new risk right now. The market will pull back and offer a better entry point. Make no mistake, though. I am still bullish on stocks. Rates are low, earnings are great, profits are high, and there are still boatloads of cash out there waiting on the sidelines.

Be a smart rat: As W. C. Fields said: “the clever cat eats cheese and breathes down rat holes with ‘baited’ breath.”

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