Animal Spirits
“Wait until they get the animal spirits!”
That’s what my father-in-law told me a few years ago. We were in a bull market then, but nothing quite like this.
He was right. I’m glad I held and waited.
“Animal spirits” is a term that John Maynard Keynes discussed. He likened the saying to the instincts that drive human behavior.
Extreme behaviors, like now, are part of the game. Big payoffs can come when exuberance is high. In fact, growth investors like us pray for markets like this. We know it won’t last forever, but it sure is a heck of a lot of fun for those who hold outlier stocks.
And signs are pointing to froth in stocks.
Our recipe in times like these are to:
- Stay long outlier stocks
- Follow the Big Money
And outliers are where to be… because by now you should know our mantra: They all go up…TAGU.
But, a pullback should be on the horizon.
Big Money Sees Animal Spirits
We are now clocking 84 trading days of an overbought market. Animal spirits will do that.
And while we’ve never seen such powerful consecutive buying before, we are beginning to see some signs of exuberance under the surface.
Where Big Money goes the market follows.
So naturally with all of this Big Money inflow for so long, our readers want to know when it’s going to change. We’ve had people reach out, “make sure to let me know once the market magician exits the stage!” Of course, we will!
To drive home the exuberance we see now, let’s rewind back to June. Back then we saw record breaking buying. Below, you can see the big green buying circled to the right:
That big circle indicated unsustainable buying in stocks. We got cautious. A week later, the market had a 6% pullback… in a day. The record buying in stocks and ETFs set then, still stands. The animal spirits were howling loud and clear.
Since then, we haven’t logged any monster days of buying.
But, that all changed this morning. Check out the big green stick from yesterday – clearly someone was buying stocks:
And that’s not all the green we saw. Check out the ETF buys:
This is new data folks. Buying like this tends to point to near-term peaks. You can see that via the red arrows. Usually the big green prefaces a cool-down.
Now, let’s look at the Big Money Index. Obviously, it is in a slow-moving downtrend. While market indexes power higher, the BMI sputters. We pointed this out last week. And even with the big market rally, it’s still muted:
So here we have it – signs of extremes are beginning to show up. A falling BMI and unsustainable buying are points of concern.
Data is appearing to shift.
And while 2020 has been a year of supply and demand 101, that’s what makes MAPsignals so special. You don’t need a narrative other than to follow the Big Money.
What drives markets down 40% in weeks? Animal spirits.
What rips markets +50% months later? Animal spirits.
But, outlier stocks shine year after year.
Outlier Stocks Shine
For years we’ve believed that the secret to beating the market revolved around a handful of stocks. It’s actually been proven. And what we are witnessing now is a relentless thrust of Big Money into stocks.
And while animal spirits can lift all stocks, the outliers are where you want to put your focus. Those are going to be the ones that will hang around year after year.
Many of these stocks are household names for people…like Apple Inc. and Amazon.com Inc. They are also the kind of stocks found on the MAP 20 list each week.
This is our own personal dedicated pond to fish in.
It’s the list that found stocks like NVIDIA Corp. (NVDA) back in 2015 and SolarEdge Technologies, Inc. (SEDG) in 2017…and countless others.
Each of these green bars are the times that SEDG was a Top 20 stock. Let’s just say that it’s got somewhere to be…UP:
MAPsignals, End of day data sourced from Tiingo.com
When it’s time to get cautious – the Big Money will howl with huge unsustainable buying. It always does.
It looks like the animal spirits have come.
Listen to what they are saying: a pullback is near, but nonetheless outliers will forever guide you on your path forward.