Silent Undertow

The last time I was at the beach with the kids, I got freaked out. Everything was clam and then suddenly the lifeguard blew his whistle.

He shouted: “Rip-current ahead! Everyone out of the water! (whistle blows) You gotta stay onshore for now.”

He was very worried about the silent undertow.

On the surface, ocean waves move in sequence together.

Waves appear to be predictable; rhythmic.  But, sometimes there’s other stuff going on that we can’t see.

Anyone who has been to the beach likely heard the lifeguard whistle at some point. It’s their job to keep swimmers safe.

Swimmers mostly know to avoid danger. For example: the misleading beauty of a jellyfish. The lilting blob packs a nasty sting if you tangle with it. But then again, not all swimming risks are easily spotted with the naked eye.

When it comes to the ocean though, it’s far more complex than just the waves we see rising and falling. There are two dangers to be alert for: rip currents and a silent undertow.

They are both scary. When water rushes into the shoreline, it has to go back out to sea. Rip currents happen when water flows the opposite of the incoming waves.  They are often strong and can drag you out to sea.

Those we can actually see from the shore line… they look like this:

But what’s happening under the surface is harder to detect visually. One of the strongest unseen forces is the silent undertow.

It’s the underlying current that’s opposing the ocean’s waves. When the waves crash onshore- the water goes down and back out to sea underneath.

Stocks have their own currents. Think of a rip current as a force quickly pulling you away from profit, like a stock market correction. The best way to survive one is to swim sideways out of it. That is, don’t fight it.

But the silent undertow is much sneakier. For example, the indexes may show waves of money pulling prices higher. But, the undertow shows certain groups tugging the other way.

That’s what’s happening now. This is your rip current warning. The undercurrent is showing something different than the surface waves.

Money is sloshing around violently like from one side of the tub to the other. Those with a balanced portfolio can feel the rotation going on each day.

Let me explain.

Big Money Index Silent Undertow

Last week we detailed how stocks were waiting for the signal. Basically, we noticed opposing forces in our data. That trend is still around.

On the surface, indexes grind higher. But the undertow silently shows the Big Money Index slowly pulling lower:

That may seem alarming,  but rest assured, there are plenty of sectors seeing the juice. Prior sagging groups are cranking higher. The re-open trade is powering the small-cap rally.

But the fuel for market strength for ages now are suddenly lagging. Tech and growth are caught in a silent undertow.

As the BMI drifts lower, remember: it measures all stocks irrespective of sector. If a few groups of the market power higher, it can offset weakness in other key areas.

That’s the push-and-pull showing up in our data.

Stock And ETF Silent Undertow

How do we really see what’s going on under the surface? First, we look at volume trends in stocks. And there is a clear trend happening right now: stock volumes are very high.

In fact, Tuesday was the second-largest volume day in 2021. That was a 3.8% swing between high and low on that day.

It started with huge selling in the morning then big buying in the afternoon. That is a choppy undercurrent right there.  Check out the study below which compares Tuesday’s (February 23^rd) volumes to other big days in 2021:

You can also see the daily average of these signals in 2021 and 2020. In other words, the pandemic chaos market. Bottom line: 2021 volumes are exploding.

Here’s another way to look at Tuesday’s crazy day:

I’ve circled Tuesday’s action and the explosive volumes in the pandemic selloff. The first thing we notice of course is volumes of recent market strength come close to matching huge weakness of last year.

That means that the money changing hands is still pushing stocks higher now.

But let’s keep drilling down. Next, I’ll show you the silent undertow.

Certain growth stocks are retreating. An easy way to see this is by looking at our Big Money Stock Buy & Sells chart. These buy and sell signals determine the flow of the Big Money Index.

Again, I’ve circled what is important – the silent undertow of sellers in stocks:

But again, indexes may seem strong because this selling is localized. Many of those red signals are Technology, Staples, & Health Care stocks feeling the pressure.

Because that’s only one part of the picture, we also see some huge green signals. That’s the wave of juice going into re-open stocks.

Here’s a zoom in:

Now, that’s not the only silent undertow we can see. There’s a big-ole’ tug-of-war in ETFs too.

Like the chart above, we see the same action for ETFs. Below shows Big Money ETF Buys & Sells. Naturally, ETFs also represent waves in the stock market. As you can see, there has been a Jekyll-and-Hyde here too:

Like with stocks, ETFs are feeling the push and pull. Let’s zoom in:

The big green bars are mainly re-open themed funds. Energy, Financials (Banking), Real Estate, Leisure, Industrials, and small-cap funds are getting bought.  The selling is revealed in Utilities and Bond ETFs.  As the market expects higher interest rates, debt instruments fall.

Let’s wrap this all up. In last week’s post we said how there’s a mixed message happening with stocks. The divergence we noticed then, is slowly intensifying. What we have is a big fat rotation.

Here’s the bottom line: Money is pouring into reopen sectors like Financials, REITs, Discretionary, & Industrials. But, growth-heavy sectors are feeling the silent undertow: Technology, Health Care, & Staples.

The market’s lifeguard is signaling danger to blissfully unaware swimmers.

From our lifeguard chair- we’ll continue to monitor the choppy water and give you updates. For now, inexperienced swimmers, stay close to shore. Surfers may enjoy the swells. In this environment though- things can shift quickly.

Keep an ear out for the whistle.

***MAPsignals subscribers, look for a video update tomorrow in the Member Updates section!