My kids and I searched for 4 leaf clovers for weeks but came up empty.
Suddenly, we found our first one.
Then another.
We got good at sifting through fields of clovers…uncovering the hidden.
Looking for outlier stocks is a lot like our clover hunt.
The search for the seemingly one-in-a-million is worth it when it pays off.
Those stocks are hidden in the fields of thousands of others.
Once in a blue moon, something really stands out…like this 6 leaf clover we found:
But finding the rare gem hidden in the vast field doesn’t only apply to finding the stocks of tomorrow.
Looking at the market as a whole can be just like an endless field of clovers.
Since the crash, the past couple of months, the field looks like an endless patch of monotony.
Looking day after day, eventually, an irregularity shows up offering new perspective.
And this week – things got interesting… we’re noticing that big buyers appear to be stepping in. The level of big buying in stocks is increasing rapidly. We expect this after a washout like in March. But now that it’s finally coming, it’s a change.
It’s what’s been missing in this rally. It’s the missing 4 and 6 leaf clover.
ETF Buying Is Picking Up
A few weeks ago we went overbought, not uncommon after a deeply oversold market. That causes us to pay attention. The Big Money Index helps alert us to change. Remember we wrote how, the big money index is dropping a dime?
We told you the overbought market was more technical rather than FOMO. That’s because ETFs were notably absent.
But, the rare clover popped up signalling a change just this morning.
In this chart, red sticks indicate the daily number of ETF sell signals, while green sticks are buys.
Look how big buying in ETFs is just starting to show up. Yesterday put us at a level we haven’t seen since mid-January.
This is bound to happen after a huge rally takes hold as buyers feel safe to redeploy capital into larger instruments.
I’ve circled 2 prior periods of large green sticks and the right-most circle is the ETF buying sproutling:
But ETFs aren’t the only green shoots.
Buying In Stocks Is Picking Up
Big buying in stocks is accelerating. Yesterday was the single largest day of buying in 2020.
This makes since as markets are ripping higher on real volumes. We’ve been in a vacuum for months after the crash in March. Markets and stocks take time to reset; now we are resetting.
Overbought periods can last for many weeks, similar to now. Our data says when we go overbought after deeply oversold markets, the average overbought period is 20 trading days. It’s only been 15 thus far. The longest period was 68 trading days – or more than 3 months. As we said last week, we’re in the investing bonus level. Long portfolios can rack up a lot of gains during these periods.
Below is a chart of daily stock buys and sells. We net them out, so a green stick means net buyers and a red stick means net sellers. I’ve circled this week’s patches of green.
Yesterday was the single largest day of net buys in 2020:
Let’s zoom in:
This shift was bound to happen. Markets were severely depressed and then snapped back. Now momentum, and likely some FOMO, is starting to take over.
New Information Is Like Finding A 6 Leaf Clover
Many are puzzled by the current market action.
The news headlines are terrible: We are in a pandemic. People are dying. The economy is not doing much better. Yet stocks are staging a massive rally in the face of grim news.
Markets went overbought and for now, are staying there.
You may want to ask:
“When will it end?”
“Shouldn’t I try to get ahead of it?”
We just follow our data.
Remember: the Big Money Index is like mama goose. Where she goes, her babies (market) tend to follow.
As you can see, the BMI has been flat-lining for a while now.
Following the big money makes it easier for us to cut through the noise.
It’s kind of like trying to find the outliers in the clover fields.
Eventually you learn how. When you’re patient and know where to focus, the 4 leaf clovers start to jump out at you.
Once in a blue moon- you can find a 6 leaf clover…
Lucas is co-founder of MAPsignals. His full bio can be found here.
Prior to MAP, he was Head of ETF Sales at Cantor Fitzgerald & SVP of Derivatives at Jefferies, LLC.
Investing Bonus Level
Hiya Guys,
I’ve held my money as cash in my investment account awaiting the overbought market downturn and Q2 results before jumping back in.
Do you think it may be a good idea to jump back in now and accumulate somewhat during the “bonus level”?
Thanks,
Andre
Hey Andre –
We can never give personal advice of any kind. You’d want to speak with a financial advisor about any personal investments.
That being said, this market is taking many by surprise. Over the years, we’ve tried to not be surprised by anything that the market does…it’s not always easy!
All we can do is try and understand where the big money is likely going.
Thanks for reaching out.
-The Mapsignals Team
Understand your position, thank you for the advice.
What is the term FOMO?
We told you the overbought market was more technical rather than FOMO.
Hey Richard –
FOMO stands for fear of missing out. It’s become a popular term with stocks over the past couple of years.
Thanks for reaching out!
-The Mapsignals Team
Thank you for the article. Been reading the recent article you guys posted for the last few weeks now and kind of trying to picture it into the real market…. considering the big ETF is coming in to play, wouldn’t that keep increasing the BMI and keep the market in oversold position and keep it shooting up? Just to understand if purely using BMI to gauge the market, how accurate can it be? I’m on the learning curve here…
I noted in the article says we are only 15 days into the overbought territory based on BMI data, and the average is 20 days. To clarify, does this means after the BMI peaked for a while, and it drops the market will also follow? What is the data based on?
Eventually what goes up must come down (doesn’t have to be alot, but a slight dent will do to adjust the overall)
Hey Merlyn,
Yes – if big buying continues it will likely keep the BMI in overbought territory. The thing is, when we get an overbought signal it doesn’t mean anything other than “pay attention.”
Not all overbought periods are the same. Markets bob and weave based on different catalysts. Right now, we are in unprecedented times in terms of market action. But, we try and observe it from a data standpoint.
Typically, not always, when the BMI starts to fall from overbought it’s because buying slows or selling picks up…or both. We don’t know everything, but odds are that the market will pullback eventually. Likely, we’ll see some data points signaling that change.
-The Mapsignals Team
Hi – I am still a bit confused after reading the article, reader comments and your responses.
I appreciate no one has a crystal ball, but based on the BMI trading indicator (and based on historical market trends versus BMI), will the markets go up or down in the next 1 week, 1 month and 3 months?
Thanks,
Faiq
Hey Faiq –
We are data scientists. Keep in mind that right now, and pretty much all of 2020, has been extreme in terms of data. Markets crashed in March and now they are racing higher at an unrivaled pace. We are excited to be capturing data in such epic periods.
The BMI follows the big money. Big Money can stay elevated for long periods of time. The key, for us, is when the BMI begins to change course. That may let us know when the buying in stocks is slowing. Historically, when buying slows, the BMI falls. When the BMI falls, stocks and markets tend to follow shortly after.
So, the question to us isn’t “have we reached the top”? To us, the better question to ask is “has the big money changed direction?”
The BMI is like surfing a wave. Sometimes the wave is 6 feet tall, while other times it is 40 feet tall. Good surfers will adjust how they handle either. But, as we and surfers know, waves eventually crest. That is what we try and alert for.
Hope this helps –
-The Mapsignals Team
Good evening guys. Just subscribed today and really curious how the BMI will help me in making choices in equities and option spreads. I have always been curious about what the industrial and big money investors are doing with their money, now I have that data. Can only say “thanks” for giving us that opportunity. In looking through your information on performance though, i could only find data representing the last half of 2019. Can you furnish me any performance stats for 2020?
Hey Don –
As of mid-Juneish, our calculations show that the stocks picked in 2020 are up 10% on average. This is compared to +5.33% had you just invested in the S&P 500 (SPY).
For options, those that were picked in 2020 as of today and had you held the longs created from the short puts: 12 trades with 11 winners. The average gain is +~$7800.
Obviously, these returns are hypothetical and assume someone can get into the trade at the price on the report. It also assumes being put into a stock and holding it as of this morning. Those that follow us know that if we suggest selling a put, it’s a stock we wouldn’t mind owning.
-The Mapsignals Team