Waiting In The Wings
6 more days folks… election day is almost here.
We’re all squirming with anticipation and I speak for myself and perhaps most of us when I say, I just want it over with. Big Money is likely thinking the same way… looking at our data and history, they are likely waiting in the wings until we get a decision either way.
And that makes sense, right? Big money managers want to bet on as much certainty as they can. And close elections with a history of surprise is anything but certain. Why take unnecessary risk? Isn’t it better to reduce risk while waiting in the wings until we get a decision?
Yesterday’s ugly selloff was largely attributed to the worldwide spike in COVID-19 cases. The failure to reach stimulus resolution before the election could also contribute.
Whatever the news says, we here believe that Big Money waiting it out is the main reason. As we’ll go into, Big Money acts like the ballast in the market. When they leave, it opens the space up to more volatility. When the cat’s away the mice will play.
For now, just know that when you are focused on data like we are at MAPsignals, the evidence suggests this is what we would expect heading into the election.
The election trade works like this: They tend to dump ‘em before they bump ‘em. That’s exactly what we saw starting in August and hitting like a ton of bricks yesterday.
Big Money Index Is Waiting In The Wings
Let’s start from the top and work our way down. The Big Money Index is muted.
There is a downtrend visible from the June peak. The market finally followed suit in September. That gave way to an October bounce. But since October 12th, we’ve been range-bound.
Now, you may be wondering why the BMI isn’t falling after we’ve seen clear selling this week. That’s because the BMI is a 25-day moving average of our Big Money buy and sell signals. 25 days is about 5 weeks ago, and that was the mini-Tech Wreck we saw in late September.
So, yesterday’s action has yet to put pressure on the BMI. Some of that action we described as weak hands.
But, if the BMI doesn’t tell the full story of what’s happening below the surface, we must keep working our way deeper into our data. Needless to say, there were chunky sellers yesterday.
Pre-Election Selling In Stocks Is Here
Let’s look at a daily view of market action. Yesterday saw the single largest day of selling since the March 23rd low. That’s significant.
Below are the daily Big Money Stock Signals of buys and sells. Each day we net out the buyers and sellers.
If a bar is green, buyers won the day. If it is red, like yesterday, the sellers took control:
What sticks out to us is how much larger the selling was yesterday compared to September’s action. Let’s do a zoom-in:
And those were not the only red signals we saw yesterday.
ETF Selling Increases Ahead Of Election
Heading into this week it was eerily quiet. We called it quiet chop. We told you how indexes appeared muted, but under the surface things were more volatile.
One great way to see that is via ETFs. Look at the big chucky selling we saw yesterday.
Green bars indicate the number of buys and red are sells. We’ve circled yesterday’s selling off to the right. It’s the single largest day of selling since the March 23rd low:
This type of activity is risk-off…
If you ask me, it looks like money managers are waiting in the wings.
At the start of this post, I discussed the Big Money acting as a market ballast. Old tall ships needed literally tons of weight or ballast in the bottom of the hull to stabilize the boat in the water. If there wasn’t enough weight, the boat rocked back and forth or even toppled over.
Big Money is the market’s ballast. Several studies have found that up to 90% of daily stock trading are big institutions. So, if they take their chips off the table for the most part, the ballast is taken away.
This opens the door for volatility. When the cat’s away, the mice will play. Algorithmic traders will test liquidity- especially on bad news days like yesterday’s COVID spike. If they try to sell some stock and there are no buyers (no ballast) price drops happen faster and easier. Selling intensifies because there’s no one there to shore up the markets.
When Big Money isn’t around to take on risk, the shock absorbers are just gone. And things can spiral quickly.
That’s what I believe we saw yesterday: uncertainty setting the stage for the Big Money to exit to the wings. Then when some negative news hits, the shenanigans begin. High Frequency traders jump in and go to work… after all, highly volatile days are usually when HFT firms make most of their money.
And while this all may be unsettling for you, this pre-election action follows our narrative to a “T”. If you haven’t read it yet, our new BMI white paper looks back in history at every election since 1992, and the pattern that emerges is clear. Big Money sells ahead of the election, and buys after the outcome is known.
The Bottom Line is this: sometimes there are bulls, and other times there are bears. Election years offer plenty of uncertainty prior to the vote. So, headed into November 3rd, we expected a volatile, even short-term bearish setup. That’s what we are seeing.
But, that’s only half the story… once the election outcome is known (a clear winner) there’s historically a good chance that Big Money buyers will swoop back in.
Only time will tell if 2020 follows suit.
In the end though, it’s all secondary to Mapsignals’ one main axiom: we firmly believe that outlier stocks will continue to be great no matter what is thrown their way.
Elections are no different and are really just another 4-year bump in the road.
And history suggests Big Money is waiting in the wings until they can be clear on where to put their money.
All eyes on November 3rd…