Archives for January 2020

Fact: Joe Burrow threw for more touchdowns this season than the prior 4 LSU seasons combined.

Quote: Winning is habit. Unfortunately, so is losing. -Vince Lombardi

Charlie and the Chocolate Factory with Gene Wilder fueled the imagination and also freaked me out.

If you remember the super fizzy, lifting drink scene where Charlie and his grandpa stole a sample – they floated up and nearly got shredded to bits by the ceiling fan. They had to burp to get back down to ground level. It’s like this bull market which is also fueling the imagination and freaking people out!

“Charlie, have you ever paid attention to big money in the stock market?”

The Wrap

We are seeing off-the-charts buying persisting right through the new year. Last week saw whopper-sized buying and hardly no sells. 10 of 11 sectors saw more than 25% of their institutional-sized stocks log buys. It’s like there is a vwap buy program day after day.

As the market goes up, you may wonder “when is a good time to get in and where do I put my money?”

The Big Money Index is now at 87.6% which is wildly overbought. It may be hard to fight the feeling of wanting to get in if you’re on the sidelines, but you’d likely be buying at an unsustainable top.

The reality is it’s not main street buying. It’s not you and me. I am not hearing people at the gas station raving about stocks.  The office water-cooler doesn’t have people clamoring to compare Fidelity accounts.  That was the case for bitcoin fever – I saw it and you likely did too.  When the Coinbase comparisons peaked, so did the crypto market. We’re nowhere close to that.

That’s the good news: this bull market has loads of room yet to run. But timing-wise, this market is overbought and due for a pullback.  When the BMI starts to fall, that’s the signal a top has likely been reached. Based on the data, I can’t, in good conscience, recommend buying into a setup like that.

As for where to put your money, I’ll answer that with a story about football. A week and a half ago I went to New Orleans to watch the Clemson/LSU National Championship game in the Superdome. Man, it was incredible. Being from Louisiana, I had to go. I needed to see an outlier in person.

That’s us (Mapsignals co-founders) at the game.

An outlier is someone or something that clearly deviates from the ordinary.  Babe Ruth was a baseball outlier: he skewed home runs for 100 years. Michael Jordan was a basketball outlier, establishing long-held records that only Lebron James is coming close to breaking.  Wayne Gretzky was the hockey outlier – there was Gretzky, then everyone else. You can see what I mean in this graph:

The Clemson/LSU game was less about the championship for me and all about seeing Joe Burrow.  This is the college football outlier. He slayed records. He threw for more touchdowns this season (60) than the prior 4 LSU seasons combined. He lead the NCAA with 5,671 passing yards.  He has become a legend in college football.  And if you want to know what an outlier thinks of himself after he caps off the big prize, here is a picture of the screen after the game:

Joe Burrow when asked “who’s the daddy?”

Outliers are where to put your money. In a sea of stocks, I focus on the Joe Burrows: only the best. It means I don’t care about 99% of stocks. There is evidence that those outliers, 4% of all stocks, are responsible for all the gains (above treasury bills) in the market for the last 100 years according to this Hendrik Bessembinder paper.

While you stay patient for a Charlie like, burp-buying opportunity, make your outlier shopping lists. Look for stocks with growing sales and earnings, big profits, low debt, and amazing businesses.  Big Money tends to find these stocks.

Once you win- you get that face. Gene Wilder had it. Joey Burreaux had it. MJ, the Babe, the Great One- they all had it.  They knew they were the outliers. When you look for when and where to put your money in stocks, play the odds, and bet on the outliers. They are the ones that keep winning, that keep shattering records. But then again, I’m not telling you anything new… You know it.

Get in the winning habit. According to Vince Lombardi: “Winning is habit. Unfortunately, so is losing.”

Fact: The top 20 poker players have taken home over $600 million collectively.

Quote: You can’t stop the waves, but you can learn to surf.- John Kabat-Zinn

Self-made trader Larry Hite said: There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. 

zerodha.com

In life and poker, you need to know your odds.  When you’re holding aces, you should bet big. The odds are on your side and you could win big.  You may lose if someone else has a better hand on a fluke, but it’s a good bet.

When you have 8-deuce it’s a low odds hand. Would you advise anyone to cash out their retirement accounts to play the lotto? Nah, you gotta sit tight and be patient.

The Big Money Index

We are still in the red area. Day after day, buying is huge.

That doesn’t mean to go out and sell stocks. The BMI will tell us when the wave of buying crests. When it starts to decline and the data changes, that’s great information.

Now we don’t know when the massive buying will stop, and the shift will begin. It might be today or in 6 weeks. It’ll eventually stop though.

That’s what waves do – they reach crest points.

When will the buying wave crest? They say: don’t fight the trend. Well, don’t fight the BMI either. Generally, stocks head up if it’s rising. When it’s falling – stocks tend to follow. The BMI is accelerating right now. It makes sense given the one-way market the past 3+ months.

Health Care Crest

Want to see what a crest looks like? A few weeks ago, we talked about Health Care becoming overbought. In other words, buying was wickedly high.

That light blue line is the wave cresting. Buying has slowed and we expect the index to fall soon…

The big money is made by holding the best stocks over long periods. The big returns are made by being patient and going all in when you get handed aces. Those who went surfing when the odds said it was a good bet are enjoying great gains now.

Watch the waves and let them tell you what to expect. If it feels unnatural, just remember investing can be seen as chance or skill – just like poker.  You can learn to win at poker and investing. Just ride the wave. “You can’t stop the waves, but you can learn to surf.” – John Kabat-Zinn

mauinow

The duck test goes like this – “if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”

Based on the duck test, our data says markets are overbought and due for a healthy pullback.

From wikipedia, “A mallard, shown looking like a duck and swimming like a duck.”

Investors seem to be greedy. That’s usually not the time to be buying stocks. Let’s perform the 3 part duck test to see if markets are overbought.

ETF Buying is Huge Right Now

We measure ETFs and look for big buying and selling. Recently, buying surged.

We’ve seen this before – it tends to preface lower market prices. Last time it happened was mid January of 2018. Just before a pullback.

It looks like a duck.

The Big Money Index is Overbought

We measure thousands of stocks each day looking for big money buying and selling. Recently, we broke into the red area…ie overbought.

That just means that buying is extreme compared to selling.

When the index begins to fall from the red area, markets fall.

Here is the Big Money Index.

It swims like a duck.

You can see the average returns after we reach these red areas. Out to 7 weeks is lackluster.

Keep in mind these periods are after 2012…an incredibly bullish 7+ years.

Buying In Stocks Was Off The Charts

Weeks ago there was a shock wave of buying in stocks.

It’s a rare event when all sectors see massive buying. In yellow below, you can see the % of the universe showing big volume buys.

Usually you see this type of out-sized activity when the market has a flush out…ie bottoms. It’s a cry of “uncle.”

It quacks like a duck.

Bottom line: we’ve seen signals like this before. Signs point to a healthy pullback. We’ll be getting our buy lists ready.