Did you know that blue jays can mimic the sound of hawks?

They do it to scare off rodents – the hawk’s natural prey – from bird feeders. That leaves the blue jay all alone to feast. Clever, eh?

Well, this deceptive phenomenon doesn’t strictly occur in the animal kingdom… In fact, I see it all the time in markets.

Here’s what I mean…

Even when things look rosy in the stock market as they did last week, the larger forces in the market may be acting the exact opposite. You can’t let an up day or a down day be the only thing you rely on to know what comes next. The data is what reveals the truth.

In today’s issue, I’m going to show you two reasons why there’s undoubtedly more volatility ahead – even though the market seemed to have a great close last week.

You’ll also learn why you shouldn’t trust any big rallies in the coming sessions… It’s just the blue jay mimicking the hawk.

Wall Street’s Deception

Veteran readers know that I’ve spent much of the last two decades creating an unbeatable market-reading system. It shows me where the big money is going – the major hedge funds, institutions, and pensions in the market.

And despite what looked like a great close for stocks last week, my data still shows that the big money isn’t buying the rally. In fact, they’re selling it.

You see, when markets rally, I like to see big-money buy signals to confirm the strength of the move. (These show me how many stocks the big money were buying, or selling, in each sector.)

But last week saw the opposite… Across 11 market sectors, there were 437 big-money sell signals and only 53 big-money buy signals…

Sector Big Money Buying Big Money Selling Percent of Sector Bought Percent of Sector Sold
Technology 8 41 4% 18%
Discretionary 19 14 10% 7%
Industrials 6 33 4% 23%
Staples 0 34 0% 32%
Materials 1 10 1% 13%
Healthcare 11 60 5% 29%
Communications 1 18 4% 78%
Financials 4 79 2% 48%
Utilities 2 14 5% 33%
Real Estate 0 62 0% 64%
Energy 1 72 2% 136%

I also like to see sector leadership from a market bottom. Right now, we don’t have that. The best I can say is tech didn’t see major selling pressure. Selling was most dominant in Staples, Healthcare, Communications, Financials, Utilities, Real Estate, and especially Energy.

When 25% or more of the sector universe is bought or sold, it turns yellow. That’s our data saying “Look here! Something is happening in this sector!” Notice the yellow is only in the sell column?

In short: Despite how stocks looked last week, there was a lot of selling behind the scenes. That’s Wall Street’s deception in plain sight.

You may say: “But the S&P 500 rallied 1.9% from Wednesday’s closing low, and 2% from the intraday Wednesday low!”

Okay… Let’s examine that. And to do that, I want to look at volume.

Painting a Too-Rosy Picture

In markets, there’s many different ways to display volume. And how it’s displayed is another of one of Wall Street’s tricks…

Take a look at the following volume data on the SPDR S&P 500 ETF (SPY) from Yahoo Finance:

Date Volume Change from Previous Day
9/21/2020 99,450,800 -1.11%
9/22/2020 63,612,100 1.02%
9/23/2020 93,112,200 -2.32%
9/24/2020 76,681,300 0.27%
9/25/2020 71,014,800 1.62%

Looking at this, you might think: “Friday’s rally had above-average volume – a clear sign of real buying!” But you would only be sort of right.

Turns out, Yahoo Finance calculates average volume using 63 trading days’ worth of data – about 25% of the trading days in each year. In other words, it uses 3-month average daily volume.

This doesn’t really fit with how professional traders analyze data. It’s far more common for traders to use recent data to make their decisions – not the past three months’ worth.

If we use a 20-day average on Friday – a more useful metric for real traders – it comes out to 85,473,355 shares. But, compare this to typical 20-day average trading volume of nearly 171 million shares on a similarly strong day from the past year, and you can see how thinly traded last week’s rallies really were.

Here’s the bottom line: the most recent data tells me we likely haven’t seen the bottom yet. Election volatility is still on the horizon and big-money trading activity is higher on down days than up days.

But I don’t want you to worry. On the contrary, any coming volatility points to potentially better entry prices on quality stocks.

And like I said last week, I’m all but certain we won’t revisit the March lows. That was a once-in-a-cycle move.

Stay the course. Find the best stocks. Buy them on down days. Your future self will thank you.

Patience and process!


Jason Bodner
Editor, Palm Beach Insider