Broker Check

Data Can Be an Excellent Reframing Lens for Investors

| February 26, 2024

You may be wondering when the markets will pull back. That’s natural. The news media regularly prepares us for disaster. Wall Street constantly worries. And if we think about the collective emotional state around October 2023, this rally may still seem illogical to some.

Back then, everyone (except us) wondered when the pain would end. Now they’re asking when the bottom will fall out. The common thread here is emotion can cloud the ability to see clearly.

Thus, reframing things can be powerful, especially for investors. In fact, humans do it all the time. Infrared goggles help us see at night. X-rays allow us to peer at bones. Ultraviolet light enables us to discover and treat skin conditions.

For investors, the different lens is data. With data, emotion can take a hike.

Today, it's important to acknowledge we’re starting to see some of the short-term volatility we've mentioned recently. That said, there’s investor resistance when viewing the overall landscape. As of this writing, even with recent short-term bumpiness, the S&P 500* has continued to hold above its 20-day moving average which exemplifies the markets continued resilience:

However, one of our most trusted metrics indicates downside risk in the short- to intermediate-term. Our readers know about MAPsignals’ Big Money Index (BMI), which is a 25-day moving average of all “big money” professional investor buys and sells. The BMI fell from overbought on Feb. 5, which means we should be aware of potential bearish action ahead in the short term:

Still, there’s a clear divergence. Notice the circled area, where the BMI is falling, but the market (as indicated by the blue shaded area) is holding steady. As we said last week, the BMI dips are due to massive buying from December rolling off the 25-day equation. Massive selling isn’t the issue right now.

The Feb. 14 inflation report showing stickier-than-expected inflation data caused the stock market to puke on itself that day. Small-cap stocks were hit hard, and the S&P 500 fell too. But as the yellow arrow in the chart below shows, it was a blip on the radar, especially relative to past instances of heavy selling. In essence, stocks puked and rallied:

Additionally, in the following chart showing daily large trades without regard to buying or selling, it’s clear that volumes remain healthy and steady, reflecting a defiant market:

Turning to buy action, in the past week, “big money” investors have been focused on smaller stocks with big growth potential, despite the one-day drop in small-cap stocks a couple weeks ago:

Small- and mid-cap stocks have continued to see outsized attention from “big money,” which mirrors the broader action since October 2023: As many people wonder where the market will go or when the bottom will drop, “big money” has stayed consistently focused on growth stocks.

What sectors are showing strength and weakness? Per our friends at MAPsignals, the top sectors are industrials, technology, financials, energy, and discretionary:

The fact that we're continuing to see tech, industrials, and discretionary rate this high is constructive. These are the engines of growth that fuel economic expansion and sustained bull markets. Historically, when these types of companies lead the way, it indicates a strong economy looking to grow.

So, when is the market going to crack? While others may lie with predictions, the truthful answer is nobody ever knows what really lies ahead. That’s why we follow the data. For instance, last week’s trading began with uncertainty and doubt. But then one blowout earnings report turned the tide for seemingly all stocks and the market’s upward climb kept on going.

This is why we remain disciplined by selectively taking partial profits on big winners and rebalancing on predetermined schedules. It allows us to raise some cash for any short term consolidation while staying positioned to participate in further upside.

Now, if we took our best guess (subjectively) on when volatility will most likely arise, we think it will be when earnings season winds down in the next week or two. That said, the most recent earnings announcements have been good for stocks in general and fantastic for some individual companies. Looking broadly at this earnings season, according to FactSet, as of Feb. 16, 79.0% of S&P 500 firms have reported earnings. Of those, 75.0% beat earnings estimates and 65.0% beat revenue estimates.

Given this data, it’s safe to say earnings have worked by a wide margin. Even if there are short-term dips up ahead, this earnings season’s announcements bode well for investors with long time horizons and is providing us with optimism that we may need to raise our original year end target.  

Do you see how data can be an excellent reframing lens for investors to view markets without emotion? The data-dependent outlook provided in this post differs from the current news narrative. While the latter mostly mentions doom and gloom, our data-driven outlook is more centered on clearly seeing through the noise.

And as quantum physicist David Bohm points out, “The ability to perceive or think differently is more important than the knowledge gained.” We couldn’t agree more.

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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

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