Editor’s note: we will not be posting next week – enjoy the Thanksgiving holiday! We’ll resume regular posts on Dec. 9.
Over the last week, many media pundits wondered out loud if the “Trump Trade 2.0” that has sent markets upwards is already over. They think a market fade has already started.
But our readers know a better guide for market analysis is cold, hard data. And that’s true regardless of who you voted for.
Let’s start with the overall state of the macro market. Two things pop out to us in this chart:
First, there’s been massive buying (1,671 unusually large buys to be exact or 152 per day). The 34-year average since 1990 is 50 buys per day. Since the election, buying has hit three times the multi-decade daily average.
Second, the buying has been mostly concentrated on smaller stocks. Notice how 82% of the buy signals were in small- and mid-cap companies.
You’d think this would make MAPsignals’ Big Money Index (BMI), a 25-day moving average of “big money” investor buys and sells, rise higher. However, the BMI is drifting lower:
This is largely due to about four days of abnormal buying momentarily skewing the ratio higher:
As the above table shows, if you go back to Oct. 21, the ratio hasn't been consistently strong, and this lack of steady momentum is making the BMI drift lower.
This might make you wonder – is this cause for some concern since the initial exuberance? But let's dig further and check in on some specific sectors to see what’s actually happening under the surface.
Intense Parabolic Buying
Let’s start with an overall ranking of the sectors, according to the MAPsignals metrics:
We’ll start at the top and note how financials stocks are exploding higher. The rise of these stocks is understandable. They’re jumping on the possibility of less regulation ahead along with the possibility of increased merger and acquisition activity.
Also notice how the industrials, technology, and discretionary sectors round out the top four. This is extraordinarily bullish as these sectors are the growth engines for longer-term bull markets. They have always represented a robust and growing economy, historically.
Now let’s look deeper though at the buying and selling of these four sectors. With this view, we can see mostly strong indicators. As the four charts below show, there was intense parabolic buying.
It happened in financials:
Industrials:
Tech:
And discretionary stocks:
But notice how now they’ve crested. Those sectors are now taking a breather after some extreme moves. That said, there has not been any outsized selling. So to us, this is a perfect example of the market pausing as it begins to determine who will be the winners and who will be the losers in the wake of unexpected certainty from a new administration.
We're only seeing signs of some unusual selling (indicating weakness) in sectors like staples, materials, and health care. That makes sense as they’re traditionally defensive in nature.
Thus, despite a currently falling BMI and recent choppiness within the markets under the hood, things look fine overall, especially from a cyclical growth perspective.
Strong Macro Support
So, what should we make of this setup? This is where things get interesting.
We know you've seen the following chart 1,000 times. Well, here's 1,001:
We are still in the strongest time of the year, historically. But don't forget that January through April are historically strong months too. These seasonal tailwinds, falling interest rates, and the incoming business- and tax-friendly administration create strong macro support in the near-to-intermediate term.
But what about that fading rally being promulgated? To answer that question, let’s examine the explosive buying and see what it may hold for the future as we tie in historical context.
First off, there were unusual buys of over 100 signals for seven consecutive days after the election:
On average, this worked out to be over 200 buys per day. Our friends at MAPsignals were kind enough to examine the historical data to determine how often this has occurred in the past: 31 times. As you can see, the average forward returns are strong and with a positive outcome the vast majority of the time:
But we need an apples-to-apples comparison from a historical perspective. See, the problem with the above table is that volumes have been steadily increasing since 1990. So, buying must be normalized from a percentage ratio standpoint to find similar setups.
Importantly, those seven strong buy days in November mentioned above accounted for 10% of the buys for the prior trading month (i.e., the previous four weeks). With that reliable ratio in hand, MAPsignals looked for similar times in history and found 414 occurrences – and they span a much broader time frame than the previously referenced 31 instances. Thus, the dataset is stronger because it’s deeper and more representative of history.
Armed with a much bigger and more reliable dataset, we can see the forward returns were absolutely staggering:
Taken together, this current and historical data is positive. There’s been an understandable market breather following historically intense parabolic moves in the immediate aftermath of Nov. 5.
In other words, markets are resting up before getting back to work.
* Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
*Past performance does not guarantee future results.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.