[The views expressed herein are those of the author and do not necessarily reflect the views of Investopedia.]
Salvino D’Armate is most often credited with the invention of the first wearable eyeglasses around 1284. And thank God for Salvino! When I was a kid, I had terrible vision. My earliest memories are sitting in the ophthalmologist chair looking at eyecharts. The letters were fuzzy until the doctor lowered the scope.
Different lenses would snap things in and out of focus. I have a unique eye condition: my eyes don’t work together. I literally have two different views of everything all the time. It may sound annoying, but it gives me unique perspective on life.
But my favorite thing to see with two views is the stock market. In today’s first article of a two-part miniseries, we will look back at 2020, a year like no other, through some different lenses. This way, perhaps we can come away with some diverse views but a more focused picture of what transpired.
Looking Back
On New Year’s Eve 2019, most were ecstatic to leave the year behind. But 2020 trounced 2019 in the suck department. Most faced their first global pandemic. Stocks were extreme. We saw an incredibly bullish January. Then COVID-19 came along and dramatically changed everything.
Stocks fell drastically as COVID altered the very fabric of our lives. Tens of millions were infected as over a million died around the world. Millions of jobs were lost. March saw seemingly insurmountable fear and darkness.
But looking back now, we are in a better spot. I am always an optimist. Back then, I bet on America by looking for great deals on outlier stocks. I knew we would recover as we always have.
Now, I’m more positive than before. With several vaccines on the horizon, mark my words: we will come out of this stronger than ever. We’ll get to that, but first let’s look at 2020’s volatile year through a few different lenses.
Most see the world through the lens of the news, and 2020 had some of the more colorful headlines we will see for years. Here are just a few that stood out.
- Jan.16 – Stocks Continue Record Climb as Earnings Overshadow Impeachment, The New York Times
- Jan. 30 – Coronavirus Claims More Lives, Yahoo Finance
- Feb. 27 – Dow Plunges 1,100, Worst Point Drop in History, Will Fed Act?, CNBC
- March 20 – Central Banks Inject Massive Stimulus, Yahoo Finance
- April 20 – Gilead Sciences’ Experimental Drug Resulted in ‘Rapid Recoveries’, Yahoo Finance
- May 29 – Powell: Fed Is ‘Days Away’ From Making First Loans to Main Street, CNBC
- June 29 – Fed Opens Up Second Part of Its Corporate Bond-Buying, CNBC
- July 20 – US Coronavirus Deaths Top 138,000, Yahoo
- Aug. 31 – Dow & S&P 500 Book Best August in 36 Years, MarketWatch
- Sept. 21 – Stocks Sink as September Gloom Continues, Yahoo
- Oct. 30 – October Was Worst Month for Dow since March as Coronavirus Was Spreading, CBS News
- Nov. 18 – Uncertainty Over Fresh Stimulus, Yahoo Finance
- Dec. 3 – Stock ETFs Attract Record Inflows During November, Yahoo Finance
Sad but true: most news is doom and gloom. Humans prefer negative scary headlines. The average person favors a story about catastrophe or death than happy things. It’s evolutionary, as focusing on the bad stuff kept you alive.
It is no surprise then that the above headlines are predominately filled with misery. And rightly so, after all: it was 2020.
But what happens when we put on a new lens and look at the same thing? Here is a chart of the Big Money Index (BMI). It’s an accurate and timely indicator of where huge professional investors are likely moving their money.
It’s created by scanning and ranking 5,500 stocks every day. The process assesses the health of each company: sales, earnings, debts, and profits. It also looks at mechanics: how is the stock trading, price highs and lows, etc. It ranks them strongest to weakest, then looks for when Big Money is buying the best stocks. My research firm then aggregates the buy and sell signals on a 25-day moving average. When we plot the BMI over the S&P 500, it’s powerful.
Look at the yellow line. When it rises, big money is buying. When it falls, it is selling. Below the green is oversold – we expect a rebound shortly. Above the red is overbought, but this can last a while. That’s where we are now.
The BMI peaked at the end of January. Stocks still rose for weeks and then plummeted. I warned you it would happen and was right. Granted, I didn’t know a global pandemic would wreck life as we know it. But Big Money sure knew something was about to change. Buying became unsustainable and then vanished. Big Money foresaw it and dumped stocks on unsuspecting everyday investors who kept on buying until the market drop. Notice how Big Money was selling well before?
In early April, the mood was awful. The BMI signaled a heavily oversold market. I told anyone who would listen to buy stocks. It was unpopular, but the data told me I was right. The BMI prefaced a monstrous rise in stocks.
The BMI went overbought May 6, and I warned that it could remain that way for a while. Again, I didn’t know it would stay overbought for four months, breaking my previous records. Once that index started to fall from overbought, the market followed into a volatile patch.
Remember: I looked at the BMI every election year since 1990. I noticed Big Money sells ahead of elections and buys thereafter. It makes sense: if you manage billions, you like to bet on sure things – elections are anything but. Right on schedule, the market did what I thought it would.
And they’ve been buying ever since the election and vaccine news. Now we are overbought again, and remember that it can stay overbought for a while. My data says that the BMI should peak Jan. 6. When it starts to fall, it indicates that a near-term market peak is nearby. That’s the ideal time to take profits by raising cash to buy outlier stocks when they go on sale.
We just saw 2020 through the BMI lens. Keep in mind that it said nothing of news headlines. Now, let’s put two lenses on. The following chart just plots the news headlines above on the BMI.
We notice that the news is a less reliable indicator of forward market prices than the BMI. I’d argue that, as news gets positive, market peaks are near. And when it gets pessimistic, market troughs are near. Either way, my analysis shows me a clear truth: Big Money investors don’t trade the news; more likely, they trade before news.
So we’ve looked at 2020 through the lens of news and Big Money. Finally, let’s look through the outlier process lens described above: when Big Money buys the best stocks. My research firm examined all 30 years of live and backtested data. This process identified an average of over half the top 5% performing stocks of the S&P 500 index, meaning 13 of the top 25 performing stocks of the S&P 500, each year. And it found them early: often before they went rocketing higher.
So how did this process handle 2020? Below are 2020’s top 25 performing S&P 500 stocks as of Dec. 10, 2020. The process found 16 of them early in their cycle, nabbing nearly half of their move for an average return of +41%.
The average 2020 return of all S&P 500 stocks so far is 8.94%. Removing the top 25, the remaining 475 stocks average 4.98%, cutting it by 44%! Meanwhile, 40% (195 stocks) of the S&P 500 stocks are negative so far in 2020.
The message: holding outliers means everything. If you miss them, you can expect average returns at best. In 2020, if you didn’t hold the top 5%, your return got halved.
Looking Forward
2020 was a calamity. So, where do we go next? I’m not a crystal ball guy. I love data, and armed with it, I can make predictions more confidently.
Some predictions (opinion) for 2021:
- Markets will keep rising throughout 2021.
- Retail investors will buy stocks in January in a big way, likely the time to lighten risk.
- The BMI will peak on or near Jan. 6. Look for a market peak sometime between Jan. 15 and Feb. 7. I anticipate a substantial S&P 500 pullback of say 9%.
- Year-over-year earnings comps will be epic in 2021. The second and third quarter will likely be the best earnings and revenue growth of my lifetime.
- Growth stocks will get their groove back. The rotation into value will continue, but more muted.
- Outlier stocks will continue to hit new heights.
- There will be one oversold period for stocks in 2021: an opportunity to buy phenomenal companies at great discounts. Isolate prior outliers unfairly punished from overreactive markets.
- We will see more bombastic headlines. Many will seem designed to shake investors out of stocks. News sells advertising by getting people afraid because they focus on negativity. Buy great stocks on news-driven pullbacks.
- The “reopen” play will continue for a while. But this will be speculative, as these sectors have yet to actually benefit from boosting revenues for a yet-to-happen reopen! When a pullback comes, I anticipate momentum sectors getting a reality check. A value/small-cap pullback will be exaggerated too: algorithmic and high-frequency trading will seize on the reversal of momentum, driving the Russell 2000 up around 12.5% since Nov. 9 vaccine news. When this happens, capital should flow back into tech growth stocks. However, when value/small-cap stocks start to beat 2021 expectations, they will get another capital inflow.
- MAPsignals will identify more than half of the S&P 500’s top 25 performing stocks in 2021, and early.
- As usual, more market twists and turns will punish ordinary investors who will suffer from panic and/or overconfidence.
- 2021 will improve from 2020! We will be healthier. A vaccine will roll out, and a return to life as normal is very much visible on the horizon.
- 2021 will provide just as many phenomenal investment opportunities as years past, although opportunity rarely feels like it. March lows for stocks were highs for despair. Money managers were crying on TV. People were dying along with the economy. That did not feel like opportunity; it felt dreadful. But that was the prime opportunity.
There you go. We looked back and forward through different lenses. When looking at stocks, I only see through Big Money glasses. They know before markets move. They know which stocks to buy, sell, and when to trade. Everyday investors can’t compete unless there’s a window into Big Money. That’s how I see the world. My lenses worked in 2020 – the toughest year of all. They will also work in 2021.
When I was a kid, I walked into walls because I couldn’t see. A different lens was all that was required. When I started trading stocks, I got my hat handed to me. A different lens was all that was required. That Big Money lens has made all the difference. And it will for next year and the years to come.
“Human beings can only make sense of the world through the lens they were socialized to make sense of it through.” – Robin DiAngelo
The Bottom Line
We (MAPsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies.
Disclosure: At the time of publication, the author holds long positions in PayPal in personal and managed accounts but no positions in the other securities mentioned.
