Growing up, my dad was a huge Clint Eastwood fan. We had a shelf full of his movies.
A favorite was the Outlaw Josie Wales. I’d watch Josie ride up to a deserted town; the tumbleweeds rolling past the saloon. He took stock of the situation. He’d have his ear to the ground.
Back then, like now, being alert was critical. In order to hear far-off hoof beats of a herd, an incoming posse, or footsteps approaching, cowboys borrowed a Native American method of reconnaissance. No one could pull a fast one on Josie: he’d always have an awareness about him.
Markets, like westerns, have no room for surprises Every now and then we enter new territory. This happened a month ago when our data signaled that we have liftoff. We saw indications that markets were heading to all-time highs…and they did. The S&P 500 (SPY ETF) rallied 4.73% since then.
This morning indicated something very different. The Big Money Index reached a new territory: overbought. This is important because it’s our initial signal to be on the lookout for frothy (greedy) market conditions.
History taught us to navigate markets using data. We know that overbought conditions can and often do last for weeks. But more importantly, we have learned to be attentive to 2 critical shifts: blow-off tops and a falling BMI.
Those two things are like the sound of an approaching posse that all cowboys need to be ready for. Getting caught by surprise can be quite costly.
As of now, the BMI data signals more market upside near-term. But at MAPsignals we always have an ear to the ground.
Big Money Index Reaches Overbought
We’ve been very clear about expecting the Big Money Index to rise. The BMI prefaced the pre-election selling. Then it made a hairpin turn and started to rise. Then for weeks, it was fairly flat as that pre-election selling was holding it back. Selling data had yet to roll off.
Remember: The Big Money Index is a 25-trading-day moving average of buying against selling. Today’s reading still contains data from 25 trading days ago. Tomorrow that data exits.
Well, now that pre-election selling is rolling off, make way for an increasing BMI.
You can see how it pierced overbought levels in this morning’s reading:
We expect the BMI to rise even more in the coming days as all of that late-October selling will roll off out of the BMI calculation.
As we said earlier, a falling BMI is only one of the critical shifts we lookout for. To be clear, we expect it to rise near-term. That means higher market prices should follow near-term. But now that the BMI is above 80%, we need to alert you that stocks are officially overbought according to MAPsignals metrics.
How do we play that? We are not selling stocks. In fact, we are being methodical with our stock picking right now. Some sectors look more appealing than others, so let’s walk through them…
Ear To The Ground Listening To Big Money Sectors
After looking at the market overall, let’s analyze sectors. Three weeks ago we discussed the rotational rampage in stocks. Certain sectors were juicing, while others were held back.
Reopen stocks should be thought of as stocks that have been beaten down as COVID-19 brought them to their knees. Think along the lines of travel, leisure, theaters, retail, & restaurants. They have had terrible earnings for obvious reasons.
But now, many reopen sectors are at, or approaching, extreme levels of buying. Vaccines imminently arriving are boosting investor confidence and lifting these stocks to new recent highs. Our ear to the ground tells us to be very selective with certain groups.
Below shows our measures of sector buying. A rising green line means buying momentum is rapidly increasing. And that’s happening in almost every sector… almost.
Shockingly, buying in Material stocks is at the highest point in 6 years!
Industrial stocks are approaching prior heights:
Even energy is seeing big buying:
Financial stocks have the juice:
Discretionary stock buying is also at 6-year highs!
Finally, Real Estate is getting gobbled up:
This data tells us here, that the reopen trade is a bit extended. We’d be cautious initiating new buys on stocks like these.
Now, before you start thinking our arrival into overbought along with these overheated sectors means it’s time to sell stocks, remember we said almost every sector.
Let’s look at Technology and Healthcare.
Unlike the sectors above, Tech stocks are not near a prior buying peak:
Neither is Healthcare:
So, what does this tell us?
Prior beaten down sectors making little in revenue and earnings are at frothy levels. Technology and Healthcare with great fundamentals (which kept the market afloat during COVID-19)- are not.
When markets crest, typically animal spirits boost ALL sectors with unsustainable buying.
That brings us to the 2nd piece of data we need to keep an ear out for: a blow-off top. Investopedia defines a blow-off top as “a chart pattern that shows a steep and rapid increase in a security’s price and trading volume followed by a steep and rapid drop in price usually on significant or high volume as well.”
Generally, a blow-off top is the final gasp of greed before a market correction. When that happens, all sectors will be getting the love and so will ETFs.
Speaking of ETFs…
ETFs See Monster Buying In November
There’s big buying and there’s monster buying.
The re-risking that markets have seen the past month is eye-popping. Re-risking means the reallocation of capital: in this case, out of growth and tech stocks and into value and former class clowns. MAPsignals has been all over this rotational re-risking giving you the play-by-play.
Indications of capital inflows are also visible in ETFs. Recently, a report said November was the largest equity ETF inflow for a month… ever.
We aren’t surprised. Our ear to the ground heard the buyers stampede well in advance of any headline you’ll read today.
Below is the Big Money ETF Index. It nets the daily big money buys and sells. Circled off to the right is the buying in November:
The green arrows point to prior times when ETF buying was immense. Those times often precede market pullbacks. A blow-off top in our data is a day (or couple of days) of incredible buying alongside an overbought market.
Remember, this morning the market went overbought.
So, let’s bring it all home: The first signs of froth have arrived, but there is still likely more room for stocks to rise. As we cross into new territory, we must keep our ear to the ground for excessive greed. That will be our clear signal a selling stampede is near.
It’s like the setup of an old Western movie: everything seems fine until danger strikes.
Don’t be caught off guard. For now, we follow the trend, but sometime soon our tune will change.
And when it does, ask yourself the words of the Outlaw Josie Wales:, “Well, ya gonna pull those pistols or whistle Dixie?”