Did you know that you can lead a cow up a set of stairs but not down? It's mostly true. In fact, students at West Virginia University once directed a purple-painted cow into the clocktower at Woodburn Hall. Unable to descend the stairs, it supposedly died there from lead poisoning. Tragic as that story is if you're a cow lover, I can't fully substantiate it. But the ghost of Woodburn Hall is a real tale associated with WVU. And apparently there are those who can still hear the poor beast bellow.
I guess this week I'll liken the market to a cow. It can go up the stairs but can't be led down as easily.
I wrote the following as of Thursday's close: This week had seen a strong surge in the broad markets. What we have seen the past weeks as the market has built the right slant of the V-shaped recovery is that growth has led the pack. As of last week, the Russell 2000 had been the top performer since the Dec. 24 low. This week has seen excellent strength in the NASDAQ, which is up 2.73% as of right now. This pop has caused the NASDAQ to become the top performer since Christmas, up an eye-popping 26.58%. This can be seen clearly in the Information Technology Sector Index powering forward 4.06% and rising 30.3% since Christmas. The sector is quickly catching up the PHLX Semiconductor Index – which is up nearly 35% in the same period.
Sector strength has also been seen in energy, consumer discretionary and industrials. These sectors have a strong growth concentration. This is reinforced by the Russell 2000 Growth Index surging 28% since Christmas. The S&P 500 Growth Index is also the clear winner from the S&P indexes. The laggards are the Dow Jones Industrial Average, S&P 500 Value, Dow Jones Utilities, S&P 500 Utilities … you get the picture. The big buying has been a clear redeployment into growth. This is decidedly unbearish.
Then Friday happened: The broad sell-off was triggered by the spooky inverted yield curve: short-term interest rates higher than long-term interest rates. Germany's awful manufacturing data caused the country's short-term rates to go momentarily negative. When it costs you money to lend to a government, that's not usually a good sign. With fear stirring up over here in the U.S., this restoked the "growth is in trouble" fears, and that equals recession fears. It significantly altered the picture from one day to the next.
What’s interesting is that I've noticed an uptick in exchange-traded fund (ETF) activity. I am seeing a lift in ETF buying activity in the past few sessions. I thought it would be a good time to revisit and look at trip, stock and ETF unusual trading activity. What we see is quite interesting.
The first chart shows us the number of trips each day – that's simply the number of stocks and ETFs that trade on unusual volume and volatility. Notice the surge in trips coinciding with the trough of the market. But also notice the steady trips since then as the market has recovered. Also notice the spike in trips as the market is hitting a local peak this week.
Now let's look at unusual buy and sell signals. First, we see a monstrous spike in ETF sells in December lows. Then we see an immediate shift, albeit to less intensity, of ETF buys as the market rallied. This past week has shown us the highest ETF buy signal totals since June 2018. This sets up to be quite bullish.
Now to reinforce what we see, the stock signals echo intensely – monster selling in December, coinciding with peak ETF selling. Then the buy signals started in early January and have been growing slowly and steadily since. Again, this is quite bullish for the mid- to long-term. However, big ETF buying can indicate immediate peaks, as they have done in the past.
Now let's just recall where the buying has been. It's been in growth: info tech and consumer discretionary. In fact, 20% of all buy signals since the market made lows have been in software and semiconductors! The bears calling for the bounce before the next leg down may be missing the picture. If the investment community were poising for fall, it would be positioning long in defense – utilities, staples and real estate. Growth-heavy sectors would be out of favor, but we observe the exact opposite.
Remember a while back when I talked about how some big stocks were in many ETFs? Facebook, Inc. (FB) is present in nearly 200 ETFs. As the FAANG stocks are now making unusual buy signals, it stands to reason that we are beginning to see ETFs making unusual institutional (UI) buys. Capital is flowing into these names in a big way.
This Friday, we saw regional banks (lenders) get pounded and utilities (yield) get bought. All this really means is that the market has been grossly overbought. I've been saying this since our ratio of buying to selling went overbought on Feb. 6. We've gone up more than 26% (NASDAQ) since Christmas. The market needs to vent some steam. An inverted yield curve is a great catalyst to consolidate a little. It's worth noting that, should a recession be headed our way (inverted yield curves are touted as a recessionary red flag), they typically come 12 to 18 months later. That's a long time in a bull market.
What this all says to me is that it just continues to reinforce my belief of what caused market action in the past months. ETF forced selling caused massive pressure on stocks and broad equity markets. As soon as the flush was complete, the reversal was swift and intense. Unusual buying kicked into high gear focused in growth-heavy sectors and stocks.
The Big Bad Bear Market that never came after late 2018's technically driven drop won't likely come for a long time. I like bears, the cute and cuddly kind that my kid sleeps with. Those are likely the only I'll see for a while now. The truth is that bears are good and necessary for the market. When the bulls are right, they need someone to be wrong to take the other sides of their trades. And when the bears are right, they eventually always give way to the bulls – 100 years of rising equity prices says so.
Humans are herd-mentality animals. We are easily swayed by emotion. So, when the fear gets whipped up like a dust-devil out of nowhere, it's not long before many hop on board. The emotion gets amplified, and suddenly it's unpopular to go against the grain. It's much easier to follow. Nixon-era economist George Fielder may have been onto something though when he said: "The herd instinct among forecasters makes sheep look like independent thinkers."
The Bottom Line
We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Buying has started to pick up compared to the week prior, suggesting that the near-term trend is bullish. Any pullback is a buying opportunity.