At times, I'm sure some of our readers have felt like they were being held hostage when investing. It's not always smooth sailing. Some days it seems like your stocks are “red,” while everything else is “green.”
That frustration is real.
It took years for us to learn that it's best to keep a calm head and wait for the frustration to pass. At Cornerstone, we believe in our process, and we know quality will rise again.
Now, if we forget that and sell, we’ll make big long-term mistakes. We bring this up because many of our readers probably have been feeling that frustration since March, as growth stocks were pounded in favor of value stocks.
But we know the prudent course is to ride it out. The big picture we kept hearing was about how prior growth areas would cool down and battered sectors would rise again, which we’ve mentioned in past posts.
This macro-level view made perfect sense, but we must remember that in the short-term, the media can occasionally be correct and dictate price movements. But long-term, we want to ignore the noise and stick to winning formulas.
Why are we talking about this? Our data is showing that patience is about to pay off again.
Looking at last week, we see a relatively unchanged stock market, indicating continued churn. That’s especially true within the S&P 500, which was virtually flat, only rising 6 basis points the week ending Friday, May 28. The trusty Big Money Index (BMI) from MAPSignals, which measures is institutional activity, has been equally flat for weeks but is only just now starting to tick up:
The surface story doesn't look that exciting yet. But as we've been mentioning in the weeks leading up to this post, as we do more digging, things get interesting. Remember that the BMI is a 25-day moving average, and despite being the leading indicator for us, it's timeframe can lag. But if we look at shorter timeframes, we might predict where the BMI will go, and thus, where the market will go.
Looking at this shorter timeframe outside of the 20-day BMI, the last 10 days have shown a significant rise in buying with a sudden vacuum of selling. That means the 10-day BMI is lifting fast, but not yet fast enough to be seen in the BMI we normally analyze.
To exemplify this, look at the chart below. The 10-day BMI rose from 47 to 80 in in the six trading days ending May.
This caught our attention. Now looking further into sectors, we see more big buying last week, especially in energy and real estate stocks:
Remember though, energy and real estate were some of the most beaten down sectors. So, while those two alone show some promising buying with a flat BMI, we need to look even deeper. Recently, we’ve seen days where buying activity levels are greater than the 20-day average. That's good news since buying above the 20-day average is what propels the BMI:
The next chart shows when the past 10-day average saw more buying than selling (in purple). Before you point out that there's no purple on the most recent dates, our data show it's just about to go purple. That means there is sustained buying pressure under the surface. Also, notice how in the last year and a half, the purple areas have been constructive for future price increases:
Expanding this analysis out even further to July 2012, generally speaking, sustained buying pressure is extremely bullish:
Investors can pound big money into stocks and create a “big money” trading signal. But to make buy or sell signals, the price must be above or below the interim high or low.
To break this down, last week we saw 2,222 “big money” trading signals. That created 451 buys and 65 sells in the sector ranking table referenced earlier in this post. But looking at the remaining stocks, we're searching for when institutional investors buy stocks, but not enough to make a BMI buy signal quite yet.
This is where it gets really interesting.
More than half (53%) of those remaining rising stocks were in the top growth sectors, not value sectors. Plus, the average sales and earnings growth of those stocks was impressive:
In other words, we’re seeing rotation under the waters. This simply means that, below the surface, buying is about to power the market higher. Even more important, the traction is starting to be in recently unloved growth sectors again.
Economic growth and corporate earnings being revised higher, coupled with what are seemingly more equitable tax initiatives, are building a strong (and strengthening) case for staying fully invested through the doldrums of the summer. Some media say this time of year is historically a tougher time to make money in stocks.
But, for this summer at least, the data says otherwise.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial Services, CoreCap Investments, and CoreCap Advisors are separate and unafﬁliated entities.