Tale of Two Markets

Months ago, it seemed the market was tipsy.  All stocks were flying high and you could feel the bullishness in the air! Stocks could do no wrong.

Then there was a change… quality stocks were falling while fluff stocks floated. We were in an upside-down world. It was a sad tale of two markets.

But, today, it’s a different story… The two markets flipped: Quality stocks are rising, while flimsy stocks fall.

This is cause for celebration again.

First, let’s rewind… back in January, everyone was bullish. There was an outright craze for stocks! The good ones and the bad ones went up in unison. Remember: markets were extremely overbought for months.

We saw the gluttony for stocks in our data and wrote about it in: Are We There Yet? Signs pointed to frothy greed. That kind rarely lasts, so we began waving the warning flags.

The prevailing vibe was that the party wouldn’t end. But, we’ve been around long enough to know that all stocks don’t go to heaven. As we’ve preached numerous times, a small percentage of stocks are responsible for the net gains in the market since the 1920s.

MAPsignals is all about finding those precious few…we call them outliers. That’s our mission in life!

So once markets cooled off, we noticed quality was out of favor while “value” traps were getting love. We knew that wouldn’t last either.

So now we notice positive signs for stocks, but, there’s a catch: Only certain groups are gaining in this tape.

Leadership is thin, yet ultra-high-quality. Cream rises to the top and it’s also true for stocks.

But, it’s not just about what’s going up, it’s also about what’s going down, too.

Low-quality fluff stocks are getting pounded: stocks with no sales and earnings…like SPACs. We think that’s good.

Why?

Because before a new big bull run can start, stocks need to reset. This small patch of volatility is  where we are now.

It’s now a happy tale of two markets: cream up; crap down. And signs point to more upside in high-quality growth stocks.

Let’s look at more signs:

Big Money Index Tale of Two Markets

The market is going through a tug-of-war. Stocks with big earnings are heading higher, while stocks with big hype aren’t.

And that’s what’s keeping the Big Money Index range bound. Companies with upside earnings growth, like semiconductors, are ripping higher. Those with poor, or even worse: no fundamentals are dropping.

Through a data lens, it’s also a tale of two markets. As the stock market transitions to new leadership, things tend to get quiet. Big Money investors are choosy right now: focused on quality. While this is good for building a strong base to launch off of, it’s making  breadth low.

To show you what I mean, this weekend we looked at the drastic drop in volumes since Q1 2021 ended. Our data shows that stock buying slowed dramatically.

Below we compare the average number of stocks trading with big volumes (Big Money Trading) along with total buys and sells. As you can see, since the quarter ended, stocks have entered a quiet zone – averaging roughly 40-50% quieter:

Yes- based on our data, meaningful trading activity in stocks fell by about half since April began. So, what happened?

The market is turning its focus to new leaders. This is good news because only quality stocks are attracting capital…aka the JUICE. Here’s another way to visualize the trading slowdown. Each bar represents the total count of stocks & ETFs seeing outsized trading according to MAPsignals data:

Circled off to the right shows how quiet things have recently gotten.

Again, this transition tells a tale of two markets. Good stocks go up while bad stocks don’t.

Quality Stocks Rise To The Top

Let’s dig a little deeper. Our message for weeks has been that buyers are returning. But they are only interested in stocks with stellar fundamentals.

For about a month we discussed the quiet period for stocks. This is normal between earnings seasons. We’ve been expecting buyers to show up as companies release their earnings…mostly the ones that beat and raise guidance.

And here they come… We’re starting to see those green shoots: the sprouts of a new spring for stocks. They tend to coincide with strong earnings seasons. We can see this below in our Big Money Stock Buys & Sells chart. Green bars are buyers and the red sticks are sellers.

I’ve circled the pre-earnings quiet periods:

You can easily see that typically volumes are light approaching an earnings season. Then the buyers show up.

Off to the right circled in red you can see the buy signals on individual stocks as they increase. Most of those are stocks are crushing earnings- and that’s good news.

And the little bit of red that you see are the stocks getting sold. While it’s not a ton of selling…it’s just enough to keep our data in a slow grind pattern. It’s holding the BMI back from a full-on launch. But on balance, our data is getting increasingly bullish.

So, what kind of stocks are emerging as new leaders? High-quality semiconductors are some good examples. Take a familiar MAPsignals name: ASML Holding NV ADR (ASML).

It’s one of the best semis out there. And they just reported phenomenal numbers. Look at the steady climb…we call that the stairway to heaven:

End of day data sourced from Tiingo.com

And that’s just one: There’s a handful of other semiconductors screaming higher with Big Money love, too.

So, which stocks are getting sold? Many hype areas are feeling the pain. One group in particular getting torched are SPACs and other unprofitable companies. SPACs are hugely popular and are even getting promoted by celebrities.

We have no issue at all with hype if you can back it up. Babe Ruth pointed to the stands and backed it up with a home run. Mark Messier guaranteed a game 6 win for the 1994 Eastern Conference finals. He delivered.

If there’s nothing to back up hype- that’s the problem. And now we’re seeing it in some unprofitable areas of the market…i.e. SPACs.

For example, look at the Big Money Sell signals in Holicity Inc. (HOL).

End of day data sourced from Tiingo.com

Clearly the stock was part of the epic market rally back in January. But here is why it’s so important to follow the big money into the best quality stocks. HOL has no sales and earnings to speak of (common for SPACs) and since January, it’s been a one-way trip lower.

Stairs up, elevator down… straight to the basement.

The lack of clarity around how SPACs will eventually post earnings is one reason for poor performance. And they aren’t the only groups feeling pain.

Other speculative areas are getting hit hard, too…especially those that don’t make money. Take Plug Power, Inc. (PLUG) for example:

End of day data sourced from Tiingo.com

Clearly, Big Money investors are being choosy about what they buy.

Here’s the bottom line: Right now, outliers have regained control. It’s not a broad-based rally yet, which means investors need to be selective.

This is precisely where our process shines… eventually the best stocks out there do what they do best: they go up.

For further detail on the SPACs phenomenon, check out our latest podcast: SPACs Under Pressure As Markets Rally. In it, we also chat about themes in our data, what’s attracting capital…and what isn’t.

You can check out the video below.