Mapsignals Blog

“I’m catching a wiggle.” Think of when fishing in a pond and the line starts to wiggle. Is it a big fish? Or is it a smart minnow making off with your bait? Wiggles happen on Wall Street trading desks, too. You see, big traders are cautious…and rightly so. Any information that is leaked can and will tip their hand. So when someone is asking about a stock without saying if they are a buyer or seller, that’s a wiggle! It could be a big fish, or just an opportunistic bait seeker.

This morning our data reminded us of “catching a wiggle.” The market rallied hard yesterday after a nasty multi-week sell-off, but what we really saw under the surface was a decent amount of buying in stocks…something we haven’t seen in quite a while. Is it real buying? The short answer is probably. But instead of going on a hunch, we looked back at prior times when the setup looked similar. We need more than just a wiggle.

Here’s a snapshot of our ratio of buying to selling. It sits at 36% because sellers have been in control. We circled areas of declining ratio readings:

To drill down further, this morning we saw 4 things that caught our attention and look quite bullish:

1. We logged more buy signals than sell signals in stocks.
2. Over 50% of our stock universe (~1400) traded on unusual volume.
3. A low percentage of our universe made buy/sell signals, indicating a reversion trade.
4. Markets rallied hard yesterday.

Below are the prior times when numbers 2 & 3 occurred when our ratio was very depressed (<40%) with forward returns for SPY (S&P 500 ETF):

Bottom line: when selling slows and buying grows, markets tend to rise. The best stocks out there rise the fastest. In this sea of information, we are constantly looking for outlier stocks. We believe the worst is likely behind us near-term. Once the ratio lifts, markets will likely follow.

Selling in stocks has been gaining for weeks now. Our ratio has been declining rapidly. We’ve seen periods like this before. Below is a snapshot of our ratio of buying and selling in stocks. As you can see, the ratio has been falling in a straight line. What we want to highlight is the fact that the ratio falls as selling picks up and buying dries up. So, what’s next?

A critical level was reached this morning, that we’ve written about before, 45.6%. You can read the prior post here. Basically, when selling picks up and we fall below this level, we usually see a decent pullback in the market. Below you can see the prior times we’ve breached this level and what tends to happen afterwards.

Bottom line: we should see a ~5% pullback in the coming days/weeks. Look for the opportunity. For us, we’ll be getting our buy list ready.

Volatility stinks. It always shows up like a thief in the night. Point is, get used to it. That’s what markets and stocks do.

Media headlines have been really awesome recently, too. I’m sure you’ve seen the Trade-War tweets, and something along the lines of “The VIX spikes 30% in a day!”, or how this is “late stage cycle activity.” If you’re really lucky, you’ve seen all three! But seriously, the media needs you to click those stories. After all, they’re in the business of selling ads…and advertisers love a lot of viewers.

The bottom line is this – the sky isn’t falling. So, what’s really going on?

Tariffs, Taxes, and Fundamentals

First, last Friday, President Trump increased tariffs on 200B worth of Chinese imports. Now, we see China is retaliating with 60B worth of tariffs on U.S. goods.

So get this, I found it interesting that over the past 12 months, according to some economists, the price of Chinese goods actually fell despite the initial 10% tariffs imposed by the U.S. last year.

This is likely due to China devaluing its currency, while the USD strengthened. These things offset the original tariff. Now, I don’t claim to be an economist, but maybe the headlines shouldn’t be as “tariffying” as they seem.

Next, yields are super low. The dividend yield on the S&P 500 is right around 2% and the yield on the 10 Year Treasury sits at 2.4%. Each is taxed differently. Dividends are taxed as long term capital gains, while Bond income is taxed as ordinary income. Looking below, you can make the case that wealthy investors will do better owning stocks compared to treasuries. Bottom line: capital should continue to flow into stocks.

Third: quarterly results are good. According to FactSet, for Q1 2019:

• 90% of the companies in the S&P 500 reported earnings
• 76% reported a positive earnings surprise
• 59% reported a positive revenue surprise
• Stock buybacks rose. Q1 saw $227B worth. Keep in mind that companies can wait to buy until prices fall.
• The blended sales growth rate for Q1 2019 was 5.3%

So, what does Monday’s selloff look like according to MAP? Weeks ago we were heavily overbought and since then selling has picked up. Our ratio fell fast. We’ve seen activity like this before. Looking back since 2012, there have been 12 times when markets went from heavily overbought (80%+ of stocks showing buying) and then fell to below 60% (similar to today). In general, this coincides with a nasty selloff, like the past few days.

Below are the prior times when this happened. The “Retreat From High” shows how far SPY fell from its closing peak. But more importantly, look at the 1-6 week performance after the ratio falls below 60%. That is a lot of green. We aren’t at 60% yet, but we are close.

Bottom line: A little bit of volatility is simply a case of the Mondays.

Health Care stocks experienced heavy selling pressure yesterday (4/17/19), with XLV (Health Care Select Sector SPDR) shedding 2.88%. What jumped out at us was the large number of stocks making UI sells in the sector. This was an extreme day to say the least. We looked back at prior days with this level of selling or more to see how the sector performed afterwards. Based on the findings, there is cause for pause.

Wednesday’s data showed that over 28% of our Health Care universe returned a UI sell signal. To put this rare event into perspective:

1. YTD, excluding Wednesday, the daily average % of Health Care stocks showing UI sell signals is 1.52%
2. Going back to 2013, including Wednesday, there have been only 14 trading days where +25% of our Health Care universe has showed UI selling

Below is a look at all days since 2013 with extreme selling in Health Care stocks. We define extreme as days where +25% of our Health Care universe returned a UI sell signal. At first glance, there tends to be additional days of extreme selling post the first day of large selling. This could indicate that the sector will likely see choppy waters ahead.

BOTTOM LINE: Days with extreme selling are rare. The average forward return for the Health Care sector after these instances is lackluster at best.