How Data Helped Navigate the Bear Market
By LUCAS DOWNEY
Updated Apr 20, 2020
A few years ago, I was in a San Francisco airport waiting area. My flight home was delayed three hours. I figured I’d just work, but the room was loud and distracting. I got out my trusty headphones and put on my usual jazz. But the music was so quiet, I could still hear the crowd. I needed to program a data analysis tool. I searched “music to work to” and found a two-hour continuous mix of music: only – it was house music. I figured what the heck?
A four-on-the-floor bass drum relentlessly thumped its way into my brain. After 10 seconds, I thought: no way – this is too distracting. But then my mind released and got lost in the monotony of the music. What I thought would take six hours took a quarter of that. An hour and a half later, I was done.
Even today, when I need to program or work with data and must tune out the world, I tune into hours of Deadmau5 progressive club music at 128 beats per minute (bpm). It works, but how?
This paper offers clues: “Music genre preference and tempo alter alpha and beta waves in human non-musicians.” In short, the findings indicate that genre preference and artificially modified tempo affect alpha and beta wave activation.
And this fascinating article says that music synchronization can improve efficiency and mood. Humans also have a natural base frequency of 120 bpm: ” … isolated experiments that asked participants to tap fingers, walk, or applaud at their own tempo showed participants moving naturally at a tempo of around 120 bpm (or a 500ms delay in between pulses).” The Deadmau5 mix is 128 bpm, which breaks down into a nice mathematical grid each minute. 128 divided by 4 beats per measure is 32 bars per minute, which is a standard tune form historically.
The mechanics and math of music help us focus because they allow our brains to block out noise. Wouldn’t it be great if there was something that did that for the stock market?
For me, the answer is data. Hard numbers are my Deadmau5 for stocks. It snaps the market into focus, filtering out the emotion and unnecessary media chaos. And when we focus in on data, we find that it’s been very accurate, timely, and helpful for those who can tune out the noise and listen to it.
Each week, I write about what the data says. I go into sectors, trends, and most importantly, big money buying and selling. I often quote the Big Money Index, which tells us when markets are overbought and oversold. That market timing indicator helps us figure out when to add or remove risk. I say this week after week. So, this week, I wanted to look back and see how the data mapped out the bear market action of the past couple of months.
The following chart says it all. It may look jumbled, but simply follow along in time and look at each dot as it comes. The associated comment box will tell you the date of publication, title, and a quick synopsis of what was said in each Mapsignals Blog post. Red dots show when our data indicated lower market prices (Big Money Index falling), and green dots were when we went oversold and expected higher prices (Big Money Index ramping higher).
:max_bytes(150000):strip_icc():format(webp)/map-58d9ade8289c48f3ac197f9912e45a13.png)
The chart shows that you got a real-time accurate model of market events to come courtesy of tuning out the news and focusing on the data. Please feel free to check my work – it’s all out there.
In short, the data said:
- When the market became overbought
- When the market was due for a pullback
- When to have cash ready
- When it would go oversold
- When it would trough (off by a single trading day: March 20 was a Friday, while markets bottomed on Monday, March 23)
- When to buy
- To expect a rise
At risk of looking like I’m spraining my arm patting myself on the back, the point here is that an accurate picture of the future potentially lies in proper analysis of past data.
What does the data say now? The Big Money Index is rising rapidly. This is in part due to the utter lack of daily big money buy or sell signals. After drastic washouts like we’ve seen in recent weeks, time must pass in order for signal counts to approach normal again.
As the market volatility continues to calm and settle into a base, new leadership will emerge. Sector leadership, according to my data, shows us that technology and health care are king. This encompasses big buying and strong fundamentals.
When it comes to tech, this makes sense, with telecommuting and cloud computing in sudden heavy demand. Couple that with big consumer demand for “stay-at-home” stocks like home streaming services for entertainment and exercise. A major surge in demand for streaming means even more of a need to accelerate 5G as internet usage gets clogged country wide.
Meanwhile, health care stocks are seeing a big lift as the medical community is overloaded with care requirements and optimism for possible treatments and vaccination for COVID-19 … as evidenced by Friday’s market surge on positive news on that front.
:max_bytes(150000):strip_icc():format(webp)/sectors-8650d10837b2402c9e607585a5350e3b.png)
Financials and energy remain at the bottom of the barrel. Low interest rates and debt exposure weigh on financials, while for energy, all we need to do is look at the price of oil, represented here by the iPath Series B S&P GSCI Crude Oil Total Return Index ETN (OIL):
:max_bytes(150000):strip_icc():format(webp)/oil-206b863350b34408a8ddfc807a4237a7.png)
Sector rotations are underway, as is earnings season. The economic horizon is hazy at best, and the pandemic is still front and center. That said, stocks are rebounding swiftly, pricing in an optimistic economic recovery. “Time will tell, but data will tell sooner.” – Me.
The Bottom Line
We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see moments like these as areas to pick up great companies.
The US Economy Has Erased Nearly All The Job Gains Since The Great Recession
Marco Bello | Reuters
.
It took only four weeks for the U.S. economy to wipe out nearly all the job gains in the last 11 years.
The coronavirus and the forced closure of business throughout the country again fueled the number of Americans applying for state unemployment benefits, which last week totaled 5.245 million, the Labor Department reported Thursday.
Combined with the three prior jobless claims reports, the number of Americans who have filed for unemployment over the previous four weeks is 22.025 million. That number is just below the 22.442 million jobs added to nonfarm payrolls since November 2009, when the U.S. economy began to add jobs back to the economy after the Great Recession.
Only 417,000 more U.S. workers need to file for unemployment benefits to erase all nonfarm gains since 2009, a figure likely to be easily surpassed this week.
The rapid nature of the job losses will be unprecedented, wiping out more than a decade’s worth of job gains in five weeks. We’ll find out for sure next Thursday when the national claims for this week are reported.
“While today’s jobless numbers are down on last week, they still mean that all the job gains since the financial crisis have been erased,” wrote Seema Shah, chief strategist at Principal Global Investors. “What’s more, with many workers, including those in the gig economy, not included in these numbers, labor market pains may be even worse than these numbers suggest.”
“Concerns for the second half of the year may be underestimated,” she added. “Although governments are looking to lift lockdowns, the re-opening of economies will be only gradual, compounding financial strains for businesses and households, suppressing demand and suggesting a slower economic recovery.”
Though investors won’t receive the official look at the U.S. unemployment rate for this month until May 8, the Labor Department’s latest nonfarm payrolls report showed droves of layoffs at restaurants and bars as some state governments force the closure of the majority of their businesses.
The latest nonfarm report showed payrolls plunged by 701,000 in March, marking the first decline since 2010 and the worst fall since March 2009. The unemployment rate jumped nearly a full percentage point to 4.4% from 3.5%.
Markets Continue to Improve as Big Selling Slows
Most of us are done with 2020. It’s only April. I mean, we’re all stuck at home. I hear how people are eating like crazy and wine glasses are always full. There’s nothing to do, right?
But quarantine reflective go-getters might love quarantine. Such was the case for arguably the brightest scientist in history – 1665 found (not-yet Sir) Isaac Newton at Cambridge University in his early 20s. The Great Plague of London hit, eventually claiming 25% of the city’s population. Cambridge and other universities did the early version of distance learning – they sent students away from campuses. This was social distancing in the 1600s.
Newton suddenly found himself out of his prestigious school and stuck at home 60 miles away. With no Netflix to binge-watch, he did the next best thing – he altered human understanding forever:
- He continued his Cambridge work and completed his concepts that became calculus.
- He messed about with prisms and developed his theories on optics and light.
- Outside his window was an apple tree. Yeah, that one. Historians debate whether an apple actually fell on his head or not, but it was there and then (in quarantine) that he birthed his theories of gravity and began the laws of motion.
Not bad for self-isolation time. Naturally, I’m not suggesting everyone can go into a cocoon and emerge as a history-altering scientific genius. But at a bare minimum, this should show what’s possible with some “free time.” I’m using the time to learn a new programming language and finishing music projects I’ve been “meaning to do.”
I’m particularly excited about collecting market data during the most volatile market since the Great Depression. What that data is saying is fascinating. It’s different from what the ugly news says: deaths mount, new cases slow but are still growing, and the global economic shutdown is causing disastrous effects. We even have Ray Dalio saying that we will be in another Great Depression. But news lives on spin. I don’t see the fair comparison:
- The post-1929 stock market crash found the Fed raising interest rates. This crash finds rates cut to effectively zero.
- Post-1929, there was no liquidity. Fed chair Powell just announced an additional $2.3 trillion of loans to provide liquidity to the US economy.
- We are not alone – Europe and Asia are also pumping liquidity into the system.
So, we now have extremely accommodative monetary policy, while the ’30s was tightening. A hoped-for V-shaped recovery looks more like it will be a “U.” I see it playing out like this:
- On May 15, we see the first signs of a reopening – largely optics.
- By June, we have a functional “soft” opening.
- By September, we see signs of more “normal” economic activity.
- We start to see growth in December.
- By March 2021, year-over-year comparisons will be hard to beat at any point in history.
Those are my thoughts. More importantly, the data says that stocks have bottomed. Bears still call for lower lows, but there’s always a bear somewhere. In reality, as bad news peaks, the market has juiced from lows. Equities are finding a base. Volatility is coming back toward earth. The CBOE Volatility Index (VIX) peaked at 85.47 on March 16 and fell 50% to 41.67 on April 9. We need another 50% VIX drop to feel “comfortable.”
The Big Money Index agrees. It’s an index of unusual buying. When it’s high, buyers are in control. When it’s low, sellers are. It bottomed at 9% on March 27 and has risen to 24.9% on April 9. Remember: 25% and below is oversold, so we are about to emerge from oversold. That’s the most powerfully bullish indicator over Mapsignals’ 30-year data history.
:max_bytes(150000):strip_icc():format(webp)/bmi_001-166957f36ac7462f9feabf0242b67fb5.png)
It’s important to know that this index of big money buying is not rising because of a bunch of buy signals. We are quite depressed in terms of levels for any large buying to be taking place. The index is rising because selling has evaporated. This makes sense, as the major fund liquidations are behind us. This means that the Big Money Index can rise quickly even on low buy/sell signal counts.
All this means is that we just need to observe how the market behaves in the coming weeks. We want to see more stocks making buy signals, indicating that the market is beginning to price in a more controlled recovery. The data clearly says market lows are in, and once volatility dies down, the outlier stocks reveal themselves.
I am 100% data driven. Emotion has betrayed me in the past. And sentiment often doesn’t correlate: the market cavern was the fear summit.
As for what’s next? I think the worst case is that the S&P 500 pulls back by half of the rise from the low. Translation: worst case, the S&P 500 falls to roughly 2,550. I wouldn’t bet on us revisiting 2,192.
Data helps describe long-term models of reality. Emotion can cause major short-term dislocations. We know that happens, but it’s important to keep perspective. When it comes, find answers in data. Sir Isaac Newton took the time he was given and used it to the fullest. He saw opportunity dressed in tragedy and fear. He also knew that emotion could be logic’s enemy. He said: “I can calculate the motion of heavenly bodies, but not the madness of people.”
The Bottom Line
We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see moments like these as areas to pick up great companies.
Disclosure: The author holds no positions in any mentioned securities at the time of publication.