Why I Don’t Operate On My Gut Instincts
When I was younger and desperate to “figure out the stock market,” I’d ask everyone all the questions I could. I thought that was the best way to learn.
But I ended up frustrated at the conflicting information I would get. And nothing irked me more than hearing that profiting from the market required a lot of “feel.”
That’s probably because I had no “feel.” Or worse yet, my feelings were constantly wrong.
For example, when I first moved to London in 2001 to work in Cantor Fitzgerald’s U.K. office, I tried trading currencies using “feel.” And I lost on 19 out of the 21 trades I made. I blew up my account.
I knew in my bones that this was just no way for me to invest. I needed an analytical framework to guide my decision-making. “Feel” was fraught with issues.
As another example, a study found people scored higher in a mental agility test while wearing a lab coat that they believed was a doctor’s coat. The effect vanished when they believed the same white coat was a painter’s coat.
Internal belief about the environment – irrespective of the facts – can change smartness. If you believe you’re wearing a doctor’s jacket, you’re smarter.
But with the stock market, you may believe you’re wearing a doctor’s coat… When really, it’s just a painter’s.
When I tried just using gut instinct, it almost broke me financially. So now I look at data.
And my data is saying the markets are headed higher…
This Trend Is Going Up
As regular readers know, my name is Jason Bodner, and I’m the editor of Outlier Investor. I’m so excited to share my insights under the Brownstone Research banner and help investors make money alongside Jeff Brown.
My mission is to pinpoint the “outlier” stocks that break all the rules. These are the stocks that surprise everybody and turn modest investments into incredible returns.
Like I said above, I don’t operate off of gut instinct. Instead, I rely on the data to give me a clear vision of where the markets are headed.
And one of the key tools I use is the “Big Money” Index (BMI). There, I track where institutional buying is taking place.
Like I mentioned in last week’s mailbag, when Big Money floods into a stock, it forces the price to rise. If buyers want 10,000 shares of a company, but there’s only 1,000 to sell at the current price, then the buyers must continually pay higher prices to trade more quantity.
When this takes place over the long run, we can start to see the power of supply and demand… And with the help of my Big Money tracking system, we can get in early and ride the wave.
And here’s what we’re currently seeing in the BMI:
The BMI lets me look for unusual buying in all stocks over a 25-day moving average. That means, in essence, that I track the money moving in and out of the market.
When the blue line trends higher, that means more money is moving into the market than out… Which means higher prices are ahead.
Admittedly, we’ve had a few choppy months. But the BMI is finally trending higher once more… So much so, it’s almost overbought (see the red line).
Before anyone gets nervous, though, that’s not something to be concerned about. Historically, markets have stayed overbought for significant periods. Last year, after the COVID-19 crash, the market stayed overbought for nearly four months.
So we’ll continue to watch the trend as the Big Money piles in.
And the BMI isn’t our only indicator that shows money is moving into stocks…
Sustained Buying… But Not Extreme
Another area that can indicate a market trend is exchange-traded fund (ETF) buying. ETFs are just baskets of stocks. And they are a great way for investors to gain exposure to a sector or theme.
When there’s sustained buying in ETFs – more so than selling – that often indicates more money is moving into the stock market than out.
Recently, we’ve been seeing more buying than selling. But critically, we haven’t been seeing extremebuying in ETFs. And that’s good news…
Big spikes in buying usually coincide with peaks in the market. When greed reaches a fever pitch, markets usually pull back afterward.
But in the chart above, we can see that ETF buying is sustained but not extreme.
And when we break things down by sector, we get more good news…
Since the end of May, we have seen significantly more stock buying than selling. Additionally, that buying has been happening in prior growth areas, like tech, discretionary, and health care.
And above, we see that trend continuing.
Big Money is piling into health care (specifically oncology, neurology, and infectious disease companies)… Industrials (manufacturing stocks)… Discretionary (consumer goods, retail, vehicles, and hospitality stocks)… And technology (notably, the software companies that got dinged from February to May).
Growth saw a resurgence in June… And growth stocks in health care and tech were big winners. Health care growth stocks alone rose nearly 6% over June. Tech growth stocks had a one-month performance of over 3.5%.
As one final note, both the SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (QQQ) – which is based on the Nasdaq – have also had strong years to date.
But most of their movement came in the last few months as well.
At writing, QQQ is up 6.57% this year… But 6.43% just in the last three months. The SPY is up 12.71% year to date… And 10.79% in the last three months
And that’s a great sign of momentum for investors in the stock markets…
The Rotation Out of Growth Is Over
All of the signs are pointing to one thing: The rotation out of growth and into value is over.
Big Money is scooping up growth stocks and propelling great sectors – like health care, technology, and industrials – higher. Most of the power in the overall market came during just the last three months.
And last month in particular was strong for growth.
Even better, all this buying is still happening at reasonable levels. The BMI isn’t overbought yet, and ETF buying is staying rational.
So while summer can be a notoriously volatile time for stocks, the overall trend looks strong. And I believe we have reasons to cheer.
As I’ve shown, I’m not basing that assessment on “feel.” This diagnosis is based on cold, hard facts – which rarely steer me wrong.
So I’ll continue to go with Bonobos CEO Andy Dunn’s advice instead of operating on gut instinct: “Passion provides purpose, but data drives decisions.”
P.S. If you’d like to have any questions answered in a future mailbag, please send them to me right here.
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